Does Acquirer Cash Level Predict Post-Acquisition Returns?

Abstract

Acquirers with high cash balances on the announcement date often suffer negative post-acquisition returns. High acquirer cash also predicts negative post-acquisition return on net operating assets, suggesting that the market does not fully incorporate the bad news associated with a high cash balance into the acquirer's stock price on announcement, but does respond to poor operating performance in the post-acquisition period. An implementable trading strategy combining these findings with prior research yields average annual abnormal returns of 22%. Overall, these findings suggest investors' limited attention can affect prices, consistent with the analysis in Hirshleifer and Teoh [2003].