Cash windfalls and acquisitions
Bastian von Beschwitz
- Amsterdam Elsevier May 2018
- Pages 287-319
- Journal of Financial Economics 128 (2) 0304-405X .
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 14%. 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.