What drives bidder cash reserve effects in acquisitions: Agency conflicts or precautionary motive?

Arbeitspapier

A cash-rich company is less likely to be a bidder during 1994-2008 in the US, contrasting the findings based on earlier sample period. This is mainly due to the companies with high residual market-to-book ratios (i.e. the residual of the actual market-to-book ratio regressed on measures of agency conflicts). Higher bidder excess cash reserve reduces bidder return at deal announcement. The negative announcement effect is stronger for bidders of lower asset-tangibility, but insensitive to the level of agency conflicts. Post acquisition, a cash-rich bidder spends more funds on debt reduction, capital expenditure, but less on further acquisitions. Moreover, a cash-rich bidder has better operating performance when its residual market-to-book ratio is high. Our evidence suggests bidder cash reserve effects are more consistent with the precautionary motive than the agency theory. High cash reserve, to a great extent, indicates growth and overvaluation rather than agency conflicts.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Manchester Business School Working Paper ; No. 625

Classification and Topics

• Classification: Wirtschaft ; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance ; Asymmetric and Private Information; Mechanism Design
• Subject: precautionary motive of cash reserve ; excess cash reserve ; acquisition ; announcement effect ; Übernahme ; Betriebliche Liquidität ; Ankündigungseffekt ; Prinzipal-Agent-Theorie ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gao, Ning
• Event: Veröffentlichung
• (who): The University of Manchester, Manchester Business School
• (where): Manchester
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/102381
• Last update: 10.03.2025, 11:42 AM CET