Corporate Liquidity, Acquisitions, and Macroeconomic Conditions

Isil Erel, Yeejin Jang, Bernadette A. Minton and Michael Weisbach

No 23493, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Firms hold liquid assets to enhance their ability to invest efficiently when external financing costs are high, especially during poor macroeconomic conditions. Using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014, we study how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles. We find that higher cash holdings increase the likelihood a firm will make an acquisition. Better macroeconomic conditions, which lower the cost of external finance, also increase the likelihood of an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions. The results are consistent with the view that firms choose liquidity levels to insure against poor macroeconomic conditions.

JEL-codes: G31 G34 (search for similar items in EconPapers)
Date: 2017-06
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Isil Erel & Yeejin Jang & Bernadette A. Minton & Michael S. Weisbach, 2021. "Corporate Liquidity, Acquisitions, and Macroeconomic Conditions," Journal of Financial and Quantitative Analysis, vol 56(2), pages 443-474.

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Journal Article: Corporate Liquidity, Acquisitions, and Macroeconomic Conditions (2021)
Working Paper: Corporate Liquidity, Acquisitions, and Macroeconomic Conditions (2017)
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