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Gao, Ning
Year of Publication: 
Series/Report no.: 
Manchester Business School Working Paper 625
A cash-rich company is less likely to be a bidder during 1994-2008 in the US, contrasting the findings based on earlier sample period. This is mainly due to the companies with high residual market-to-book ratios (i.e. the residual of the actual market-to-book ratio regressed on measures of agency conflicts). Higher bidder excess cash reserve reduces bidder return at deal announcement. The negative announcement effect is stronger for bidders of lower asset-tangibility, but insensitive to the level of agency conflicts. Post acquisition, a cash-rich bidder spends more funds on debt reduction, capital expenditure, but less on further acquisitions. Moreover, a cash-rich bidder has better operating performance when its residual market-to-book ratio is high. Our evidence suggests bidder cash reserve effects are more consistent with the precautionary motive than the agency theory. High cash reserve, to a great extent, indicates growth and overvaluation rather than agency conflicts.
precautionary motive of cash reserve
excess cash reserve
announcement effect
Document Type: 
Working Paper

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