Corporate Cash Reserves and Acquisitions


  • Jarrad Harford

    1. University of Oregon
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    • University of Oregon. I thank Mike Barclay, George Benston, Jim Brickley, John Chalmers, Larry Dann, Wayne Guay, David Haushalter, Ludger Hentschel, Aditya Kaul, Jon Lewellen, John Long, Rich Luss, Wayne Mikkelson, Mark Mitchell, Megan Partch, Bill Schwert, René Stulz, Jerry Warner, Jerry Zimmerman, an anonymous referee and seminar participants at Emory, Harvard, Indiana, Pennsylvania State, and Southern Methodist Universities, the Universities of Oregon, Pennsylvania, Pittsburgh, and Rochester, and the 1998 AFA meetings for helpful comments and discussions.


Cash-rich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cash-rich firms are value decreasing. Cash-rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash-rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cash-rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cash-rich firms.