The Influence of Acquisitions on Cash Ratios of the Acquiring Firm: Evidence from the EU12

Abstract

Using a total sample of 1,850 acquisitions from 2007 to 2013 in the EU12, I examine the impact acquisitions have on cash ratios of acquiring firms directly after an acquisition and after one year. This paper shows that cash ratios significantly decline by 1.7% right after an acquisition. Furthermore, the cash ratios significantly decline by 2.2% one year after an acquisition, relative to one year before an acquisition. No significant difference is obtained between the change in cash ratios after a pure cash acquisition, and after a non-cash acquisition. Possible explanations for the decline in cash ratios after an acquisition are; the payment method, where the acquisition is often not financed in one instance; the integration costs; certain repellents aiming to discourage the acquisition; the response of a firm’s investors to the negative announcement effect of acquisitions. Furthermore, this paper shows the importance of acquisition when studying cash ratios. Various studies emphasize how certain variables influence cash ratios in a firm. Acquisitions, however, are not included in these studies, while this is a critical determinant.