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Operating Performance and Free Cash Flow of Asset Buyers

Author

Listed:
  • Steven Freund
  • Alexandros P. Prezas
  • Gopala K. Vasudevan

Abstract

We examine a sample of 552 firms that announce asset purchases. We find that the announcement period returns are negatively related to the amount of free cash flow for buyers with fewer growth opportunities. Compared to the year prior to the purchase, the mean long-run operating performance of asset buyers worsens in each of the three years following the transaction. Operating performance changes are negatively related to the amount of free cash flow, and the relationship is stronger for buyers with fewer growth opportunities. We also find that buyer firms experience a decline in the return on assets and asset turnover ratios. These findings are consistent with Jensen’s (1986) free cash flow theory.

Suggested Citation

  • Steven Freund & Alexandros P. Prezas & Gopala K. Vasudevan, 2003. "Operating Performance and Free Cash Flow of Asset Buyers," Financial Management, Financial Management Association, vol. 32(4), Winter.
  • Handle: RePEc:fma:fmanag:freundetal03
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    Cited by:

    1. Ng, Alex & Donker, Han, 2013. "Purchasing reserves and commodity market timing as takeover motives in the oil and gas industry," Energy Economics, Elsevier, vol. 37(C), pages 167-181.
    2. Lucrezia Fattobene & Marco Caiffa, 2016. "Sitting on the Board or Sitting on the Throne? Evidence of Boards' Overconfidence from the Italian Market," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(2), pages 235-269, July.
    3. Chen, Hung-Kun & Liang, Woan-lih, 2016. "Do venture capitalists improve the operating performance of IPOs?," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 291-304.
    4. repec:eee:pacfin:v:46:y:2017:i:pb:p:292-308 is not listed on IDEAS
    5. Sheng-Syan Chen & Yong-Chin Liu & I-Ju Chen, 2014. "Long-Run Stock Performance and Its Determinants for Asset Buyers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 685-716, June.
    6. repec:ebl:ecbull:eb-17-00746 is not listed on IDEAS
    7. Gao, Ning, 2015. "The motives of cash reserve and bidder cash reserve effects," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 73-88.

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