Corporate Liquidity, Acquisitions, and Macroeconomic Conditions

49 Pages Posted: 13 Jun 2017

See all articles by Isil Erel

Isil Erel

Ohio State University (OSU) - Department of Finance

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance

Bernadette Minton

Ohio State University (OSU) - Fisher College of Business

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: June 2017

Abstract

Firms hold liquid assets to enhance their ability to invest efficiently when external financing costs are high, especially during poor macroeconomic conditions. Using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014, we study how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles. We find that higher cash holdings increase the likelihood a firm will make an acquisition. Better macroeconomic conditions, which lower the cost of external finance, also increase the likelihood of an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions. The results are consistent with the view that firms choose liquidity levels to insure against poor macroeconomic conditions.

Suggested Citation

Erel, Isil and Jang, Yeejin and Minton, Bernadette and Weisbach, Michael S., Corporate Liquidity, Acquisitions, and Macroeconomic Conditions (June 2017). NBER Working Paper No. w23493. Available at SSRN: https://ssrn.com/abstract=2984670

Isil Erel (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Bernadette Minton

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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