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Cash windfalls and acquisitions

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  • von Beschwitz, Bastian

Abstract

This article studies the effect of cash windfalls on the acquisition policy of companies. As identification, I use a German tax reform that permitted firms to sell their equity stakes tax free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 14%. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are consistent with the free cash flow theory.

Suggested Citation

  • von Beschwitz, Bastian, 2018. "Cash windfalls and acquisitions," Journal of Financial Economics, Elsevier, vol. 128(2), pages 287-319.
  • Handle: RePEc:eee:jfinec:v:128:y:2018:i:2:p:287-319
    DOI: 10.1016/j.jfineco.2018.02.009
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    More about this item

    Keywords

    Acquisitions; Free cash flow theory; Overinvestment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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