Cash Windfalls and Acquisitions

von Beschwitz, Bastian

doi:IFDP.2016.1159

Working Paper

Cash Windfalls and Acquisitions

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;

JEL Classification: G30; G31; G34;

https://doi.org/IFDP.2016.1159