Abstract
The study aims to examine if cash rich firms become acquirers. The study was based on the largest 100 deals completed in the year 2017. The sample deal was selected among the 9000 deals in the year 2017. The source of data was Thomson Reuters. Firms were classified into cash rich and cash poor based on a baseline model. Six binary logistic regression models were used to examine the likelihood of a firm becoming an acquirer. The results suggest that higher the cash intensity, greater is the probability of firms becoming acquirer firms. In other words, cash rich firms tend to become acquirers. Higher the leverage, greater the propensity of firms to become acquirer. Lower EPS for firms have higher acquisition likelihood.Keywords: Debt Repayment, Mergers and Acquisitions, Capital Investments, Cash reserves, Corporate RestructuringJEL Classifications: G30; G34DOI: https://doi.org/10.32479/ijefi.7867
Highlights
Cash has a strategic role to play in an organization
Cash holding intensity with respect to total assets is higher for control firms compared to acquirer firms
The earning potential of acquirer firms as reflected by P/E ratio is higher for acquirer firms compared to control firms
Summary
Cash has a strategic role to play in an organization. The various strategic uses of cash involve financial options such as share buybacks, debt repayment, dividend increases along with operational alternatives like capital investments, product development or corporate restructuring activities like mergers and acquisitions. The underinvestment problem faced by firms due to external financing constraint can be solved if firms are able to maintain adequate internal financial flexibility. In this context, cash reserves act as a value creating mechanism for firms with underinvestment problems. Huge buffer of cash tends to increase agency conflicts among owners and managers. Agency conflicts are most severe in the presence of large free cash flows wherein managers tend to invest in projects with negative NPV (Jensen and Meckling, 1976, Jensen, 1986). On account of capital market imperfections, managers of firms prefer to maintain excess cash to fund for investment activities like mergers and acquisitions
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