Understanding Gains to Acquiring Firms : The Role of Free Cash Flow
In this paper, we show that acquirers’ free cash flow (FCF) levels have significant impacts on their takeover activities and consequences. The targets acquired by low-FCF acquirers are of inferior quality relative to those obtained by high-FCF acquirers. Low-FCF acquirers also incline using stock than cash as payment means. Furthermore, after acquisition, the financial leverage of low-FCF acquirers increases sharply, and a significant number of them become bankrupt or are acquired by other firms. Although investors respond positively at the announcement date of the acquisition, low-FCF acquirers significantly underperform relative to their peer firms in the stock market following acquisitions. High-FCF acquirers perform as well as their peer firms over the long term, although their financial leverage also increases following acquisitions. We interpret the positive association of FCF and acquirer post-takeover performance as reflecting the importance of acquirer’s financial position to its post-takeover performance. Our series of robustness tests confirm such interpretation
Year of publication: |
[2022]
|
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Authors: | Li, Lin ; Tong, Wilson ; Lam, Peter |
Publisher: |
[S.l.] : SSRN |
Subject: | Cash Flow | Cash flow | Übernahme | Takeover |
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