Cash Windfalls and Acquisitions

Bastian von Beschwitz
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Bastian von Beschwitz: https://www.federalreserve.gov/econres/bastian-von-beschwitz.htm

No 1159, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: acquisitions; free cash flow theory; overinvestment (search for similar items in EconPapers)
JEL-codes: G30 G31 G34 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016-03-02
New Economics Papers: this item is included in nep-cfn
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http://www.federalreserve.gov/econresdata/ifdp/2016/files/ifdp1159.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2016.1159 DOI (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1159

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