Published online by Cambridge University Press: 04 November 2019
This paper evaluates how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles using a sample of 47,615 acquisitions from 36 countries between 1997 and 2014. Higher cash holdings and stronger macroeconomic conditions each increase the likelihood that a firm will make an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: They decrease with acquirer cash holdings and with better macroeconomic conditions.
The authors are fellows of the National Center for the Middle Market at The Ohio State University Fisher College of Business and acknowledge the Center’s support for this research. Some of the research was completed when Weisbach was a visiting scholar at the University of Hong Kong. We thank Murillo Campello, Ran Duchin (the referee), Shan Ge, Charlie Hadlock, Jarrad Harford (the editor), Peter Iliev, Karin Thorburn, and participants at the 2017 Midwest Finance Association conference and the 2019 Northern Finance Association conference for helpful comments and Greg Allen, Dongxu Li, and Sam Osea for excellent research assistance.