The Influence of Cash Ownership on Financial Performance: An Examination of Disruptors and Acquirers

Rebecca Abraham (), Venkata Mrudula Bhimavarapu, Zhi Tao and Shailesh Rastogi
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Rebecca Abraham: Huizenga College of Business, Nova Southeastern University, 3301 College Avenue, Fort Lauderdale, FL 33319, USA
Venkata Mrudula Bhimavarapu: Symbiosis School of Banking and Finance, Symbiosis International (Deemed) University, Pune 412115, India
Zhi Tao: School of Business, University of Alaska-Anchorage, 3211 Providence Drive, Anchorage, AK 99508, USA
Shailesh Rastogi: Symbiosis Institute of Business Management, Symbiosis International (Deemed) University, Pune 412115, India

JRFM, 2023, vol. 16, issue 3, 1-22

Abstract: Cash ownership emits a powerful positive signal. We examine four sources of cash in firms, i.e., cash flows, cash holdings, cash proceeds from debt, and cash proceeds from equity. We examine the effects of cash ownership for firms growing by disruption, and firms growing by acquisition. Information signaling theory maintains that free cash flows may be used to increase shareholder wealth. Two-stage least squares regressions determined the impact of cash funding on disruptors and size of acquisition in the first stage, and cash-funded disruption or cash-funded acquisition in the second stage, for a US sample of 832 disruptor firms and 924 acquirers, from 2000–2020. Disruptions funded by cash holdings, cash flow, and cash proceeds from debt, significantly increased stock returns. A size effect was observed, with small disruptors showing significant effects. Acquisitions funded by cash holdings, cash flow, and cash proceeds from debt, significantly increased stock returns and return on assets. Agency costs significantly reduced returns and profits. Results for disruptions and acquisitions support signaling theory with free cash flows signaling higher share prices for both disruptors and acquirers, and higher profits for acquirers.

Keywords: disruptions; acquisitions; cash; cash flow; pecking order; debt proceeds; equity proceeds (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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