Abstract
This study investigates the relevance of Jensen's (1986) free cash flow theory to the market for corporate control in Australia. We introduce two proxies of free cash flow, excess cash holdings and excess accounting cash flow and test the relationship between the level of excess cash and bidders' long-run post-acquisition performance. Results indicate that the level of excess cash holdings does not provide a significant explanation for the cross-sectional variation in long-run post-acquisition performance. Results from the flow measure of cash indicate that the acquisitions carried out by bidders with excess accounting cash flow are not value-decreasing. This finding is contrary to the free cash flow hypothesis proposed by Jensen (1986).
Highlights
The results show that the test of free cash flow hypothesis in the Australian takeover market is contrary to the predictions of the free cash flow theory
Panel A shows that the average excess cash holdings of acquiring firms is negative (-0.054), which suggests that acquiring firms on average do not have excess cash holdings
This study investigates the intersection of two areas of the literature, the level of excess cash and acquisitions
Summary
The results show that the test of free cash flow hypothesis in the Australian takeover market is contrary to the predictions of the free cash flow theory. There is no evidence that the acquisitions carried out by excess accounting cash flow bidders are value-decreasing. Bidders with higher excess accounting cash flow have better long-run post-acquisition performance.
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