Cash Windfalls and Acquisitions

50 Pages Posted: 3 Mar 2016

See all articles by Bastian von Beschwitz

Bastian von Beschwitz

Board of Governors of the Federal Reserve System

Date Written: 2016-03-02


This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are consistent with the free cash flow theory.

Keywords: acquisitions, free cash flow theory, overinvestment

JEL Classification: G30, G31, G34

Suggested Citation

von Beschwitz, Bastian, Cash Windfalls and Acquisitions (2016-03-02). FRB International Finance Discussion Paper No. 1159. Available at SSRN: or

Bastian Von Beschwitz (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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