What do Firms do with Cash Windfalls?

Olivier Blanchard and Florencio Lopez- de-Silane
Authors registered in the RePEc Author Service: Florencio Lopez-de-Silanes ()

No 4258, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Suppose that a firm receives a cash windfall which does not change its investment opportunity set, or equivalently its marginal Tobin's Q. What will this firm do with the money? We provide empirical answers to this question using a sample of firms with such windfalls in the form of a won or settled lawsuit. We examine a variety of decisions of the firm to shed light on alternative theories of corporate financing and investment. Our evidence is broadly inconsistent with the perfect capital markets model. The results need to be stretched considerably to fit the asymmetric information model in which managers act in the interest of shareholders. The evidence supports the agency model of managerial behavior, in which managers try to ensure the long run survival and independence of the firms with themselves at the helm.

Date: 1993-01
Note: CF
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Citations: View citations in EconPapers (3)

Published as Journal of Financial Economics 36 (1994), pp. 337-360.

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Journal Article: What do firms do with cash windfalls? (1994)
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