Cash Windfalls and Acquisitions
Bastian von Beschwitz ()
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Bastian von Beschwitz: Board of Governors of the Federal Reserve System (U.S.), http://www.federalreserve.gov/econresdata/bastian-von-beschwitz.htm
No 1159, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
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)
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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