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Cash Windfalls and Acquisitions

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Abstract

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.

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  • Bastian von Beschwitz, 2016. "Cash Windfalls and Acquisitions," International Finance Discussion Papers 1159, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1159
    DOI: IFDP.2016.1159
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    Keywords

    acquisitions; free cash flow theory; overinvestment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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