Internal vs. External Financing of Acquisitions: Do Managers Squander Retained Profits?
This paper investigates the proposition that the source of financing of new investment has a bearing on its profitability. One important argument in the literature is that managers who have control over investment finance are more likely to pursue their own goal of firm growth, while managers who have to raise funds externally are monitored more closely by the financial markets and hence are more likely to act in shareholders' best interests. Thus, the profitability of externally financed investment should be greater than that from internally financed investment. We focus on investment in acquisitions and, as in previous studies, we show that there is a negative net impact of such investment on long-run profitability. Moreover, when we distinguish the means by which acquisitions are financed, we find that this negative net impact derives from externally financed acquisitions, while internally financed acquisitions would appear to have no significant impact on profitability. Our results therefore do not support the hypothesis that managers squander internal funds on poor investment projects. More significantly perhaps, we find evidence to suggest that capital markets and financial institutions do not generate the anticipated beneficial effects.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 62 (2000)
Issue (Month): 3 (July)
|Contact details of provider:|| Postal: |
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0305-9049
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0305-9049|
When requesting a correction, please mention this item's handle: RePEc:bla:obuest:v:62:y:2000:i:3:p:417-31. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.