EconStor >
The University of Manchester >
Manchester Business School, The University of Manchester >
Manchester Business School Working Paper Series, The University of Manchester >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/50700
  
Title:The adverse selection effect of corporate cash reserve: Evidence from the acquisitions solely financed by stock PDF Logo
Authors:Gao, Ning
Issue Date:2008
Series/Report no.:Manchester Business School working paper 550
Abstract:Rhodes-Kropf and Viswanathan (2004) suggest an adverse selection role of corporate cash reserve. Specifically, if investors know a bidder does not have to issue to invest, an attempt to do so sends a strong pessimistic signal of overvaluation. Despite its intuitiveness, this notion has not been explicitly studied in the empirical literature. Using a sample of acquisitions that are solely financed by the bidders' equity to exclude the potential complications of free cash flow, I find that firms with higher excess cash reserve are more likely than other firms to attempt acquisitions that are solely financed by stock. I further confirm that a bidder's excess cash reserve has an adverse wealth effect at deal announcement. The adverse wealth effect of cash reserve is stronger in the hot equity market period when aggregate information asymmetry is arguably high, and for the bidders whose stand alone values are more difficult to assess. In the post-acquisition years, highexcess-cash-reserve bidders operationally out perform low-excess-cash-reserve ones. Moreover, they spend more funds on debt reduction but no more on investments than low-excess-cashreserve bidders do. Combined, these results conform to the adverse selection effect of corporate cash reserve, and suggest that a firm holding more cash than what it requires may incur further costs in addition to the liquidity discount.
Subjects:adverse selection effect of corporate cash reserve
excess cash reserve
overvaluation
two-sided information asymmetry
bidder announcement return
operational cash flow performance
use of funds
JEL:G34
G32
Document Type:Working Paper
Appears in Collections:Manchester Business School Working Paper Series, The University of Manchester

Files in This Item:
File Description SizeFormat
572582560.pdf384.83 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/50700

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.