Cash windfalls and acquisitions

Bastian von Beschwitz

Journal of Financial Economics, 2018, vol. 128, issue 2, 287-319

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 14%. 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 (search for similar items in EconPapers)
JEL-codes: G31 G34 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:128:y:2018:i:2:p:287-319

DOI: 10.1016/j.jfineco.2018.02.009

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