Cash Flow Duration and M&A Activity

Abstract

Using a direct measure of equity cash flow duration, we find that firms with high cash flow duration are more likely to become an acquirer and use stock as the payment method. Both in the short and long run, stock markets react more unfavorably to acquisition announcements by these acquirers. Furthermore, the association between cash flow duration and merger activity is more pronounced during periods of high investor sentiment and for firms with weak external monitoring. These findings are consistent with the view that acquisitions are driven by stock market overvaluation of high-duration firms.

Keywords: Mergers and acquisitions, Cash flow duration, Misvaluation

JEL Classification: G34, G32