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We find that the negative relation between bidder announcement returns and bidder cash reserve is present only when a bidder has a low asset tangibility. We further find that cash-rich companies acquire less, especially in the past two decades. After acquisitions, cash-rich bidders spend more on capital expenditure and less on acquisitions. When asset tangibility is low, cash-rich bidders operationally outperform cash-poor bidders. In contrast, we do not find that the G-index or E-index systematically alters the association between bidder announcement returns or post-acquisition operating performance and bidder cash reserve. We concluded that the bidders' cash reserve effects are more related to the precautionary motive of cash reserve than to the agency theory of free cash flow.
|Number of pages||16|
|Journal||International Review of Financial Analysis|
|Publication status||Published - Jan 2015|
- Mergers and acquisitions
- Financial constraints
- Precautionary motive
- Agency theory
- Principle–agent relation
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WHY DOES ACQUIRING FIRM'S CASH RESERVE HAVE A NEGATIVE WEALTH EFFECT: AGENCY OR OVERVALUATION?
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