When acquirers are short on cash flow in M&A deals

Yaru Ren, Lin Li (), Wilson H.S. Tong and Peter Lam
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Yaru Ren: Shenzhen Univerisity [Shenzhen]
Lin Li: Audencia Business School, Shenzhen University [Shenzhen]
Wilson H.S. Tong: POLYU - The Hong Kong Polytechnic University [Hong Kong]
Peter Lam: UTS - University of Technology Sydney

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Abstract: Studies on corporate takeovers are voluminous but typically assume that acquirers are not financially constrained. We show that acquirers' free cash flow (FCF) levels have significant impacts on their takeover activities and consequences. Acquirers with low FCF, despite their high levels of cash holdings, tend to pay in stocks rather than cash. The targets acquired by low-FCF acquirers are of inferior quality relative to those obtained by high-FCF acquirers. After acquisition, low-FCF acquirers seriously underperform their peers, but this underperformance does not exist in high-FCF acquirers. Further, the financial leverage of low-FCF acquirers increases sharply following acquisitions, and a significant number of them become bankrupt or are acquired by other firms. Our evidence suggests the importance of acquirer's financial position to sustain the normal operation of the combined entity following the deals. Firms with financial constraints, therefore, should be conservative in advancing takeovers.

Keywords: Corporate takeover Free cash flow Agency problem Financial constraints JEL: G33 G34; Corporate takeover; Free cash flow; Agency problem; Financial constraints JEL: G33; G34 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-cfn
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Published in International Review of Financial Analysis, 2024, 94, pp.103312. ⟨10.1016/j.irfa.2024.103312⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04562214

DOI: 10.1016/j.irfa.2024.103312

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