Does Cash Burn Holes in Their Pockets? – Cash-Rich Acquirers & Method of Payment in M&A

Acquirers paying with shares exhibit significantly lower announcement returns (Andrade et al. (2001)). Further, cash-rich firms tend to make value-decreasing acquisitions due to possible agency conflicts between managers and owners (Harford (1999)). I investigate the interaction effects of cash-richness and method of payment on an international sample of acquirers. I find that there is a positive interaction between share deals and cash-richness. This is counter-intuitive since share deals signal overvaluation (Myers and Majluf (1984)) and cash-richness signals agency conflicts to the market (Jensen (1986)). The effect is even stronger when using the mode of financing instead of method of payment. An explanation might be that cash-rich firms are not overvalued in the first place because of agency problems or that overvaluation is not that high because the market can value cash more accurately than net assets