The motives of cash reserve and bidder cash reserve effects

What is it about?

We find that the negative relation between bidder announcement returns and bidder cash reserve is present only when a bidder has a low asset tangibility. We further find that cash-rich companies acquire less, especially in the past two decades. After acquisitions, cash-rich bidders spend more on capital expenditure and less on acquisitions. When asset tangibility is low, cash-rich bidders operationally outperform cash-poor bidders. In contrast, we do not find that the G-index or E-index systematically alters the association between bidder announcement returns or post-acquisition operating performance and bidder cash reserve. We concluded that the bidders' cash reserve effects are more related to the precautionary motive of cash reserve than to the agency theory of free cash flow.

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Why is it important?

Bidder announcement returns decrease with bidder cash reserve only when bidder asset tangibility is low. Cash-rich bidders acquire less since early 1990s. Bidder cash reserve effects are more related to the precautionary motive than to the agency theory of free cash flow. Cash reserved under the precautionary motive is beneficial to shareholders.