• takeovers;
  • long run returns;
  • performance;
  • free cash flow

Abstract:  Evidence from recent US and UK studies reveals a pattern of poor long run post acquisition performance by acquiring firms. One explanation, due to Jensen (1986) is that acquirers with an excess of free cash flow (FCF) will have a propensity to squander this on wasteful investments, including take-overs. In this paper, using a dataset of UK take-overs and proxies for free cash flow similar to those used by Lang, Stulz and Walking (1991), we find no support for the FCF hypothesis and show that this conclusion is robust to the model of long run returns employed. Contrary to the free cash flow hypothesis there is evidence that acquirers with high free cash flow perform better than acquirers with low free cash flow. Although not consistent with the Jensen hypothesis, this evidence is compatible with the emerging UK evidence that shows cash flow-to-price measures are associated with market returns.