Corporate Cash Management, Excess Cash, and Acquisitions

by Harford,Jarrad V.T.

• ISBN13: 9780815335528
• ISBN10: 0815335520
• Edition: 1st
• Format: Hardcover
• Copyright: 1999-12-20
• Publisher: Routledge

Summary

How much cash should a corporation have and should we worry when they have too much? This question has been hotly debated by manager and investors recently because managers of many of America's leading corporations have chosen to keep the spoils of the long economic expansion rather than return them to investors. As corporate cash coffers burst at the seems, some topping $20 billion, should investors worry about what managers will do with the cash when they finally decide to spend it? This study tackles these and other questions related to corporate cash reserves. After developing a benchmark for the appropriate amount of cash a corporation in a given industry needs to fund its investments and survive an economic downturn, a group of cash-rich corporations are not only more acquisitive than other corporations, but they also tend to make poor acquisition choices, effectively squandering part of their cash reserves. The stock price reaction to acquisition announcements by cash-rich firms is significantlymore negative than the reaction to announcements by other firms. The performance of the cash-rich acquirer declines following the acquisition, realizing the expectations of the stock market. Overall, cash-rich firms destroy 7 cents of value for every excess dollar of cash reserves they hold, effectively receiving 93 cents on the dollar! This study documents that not only do managers tend to squander their stockpiles of cash, but also they are able to use this cash to deter any attempt to wrest control of the corporation from their hands. The message for investors and board members to be wary of cash stockpiles is clear.

Table of Contents

List of Tables	ix
List of Figures	xi
Preface	xiii
Acknowledgments	xvii
Abstract	xix
Corporate Cash Management	1	(26)
Introduction	1	(5)
Background and Motivation	1	(2)
Literature Review	3	(1)
Actual Cash Holding	3	(2)
Cash Management	5	(1)
Cash Management Model	6	(7)
Background	7	(1)
The Costs to Holding Cash	7	(2)
Benefits to Holding Cash	9	(1)
The Model	10	(3)
The Cash Management Problem	13	(11)
Discussion of Empirical Predictions	13	(1)
Time-Series Predictions	13	(1)
Cross-Sectional Predictions	14	(1)
Hypotheses	14	(1)
Empirical Implementation	15	(1)
Data	15	(1)
Tests	15	(6)
Results	21	(3)
Conclusions	24	(3)
Corporate Cash Reserves and Acquisitions	27	(40)
Introduction	27	(2)
Hypothesis Development	29	(3)
Theory: Free cash flow and Optimal Saving	30	(1)
Predictions: Free cash flow vs. Optimal Saving	30	(1)
Corporate Control Events	31	(1)
Degree of Agency Conflict	32	(1)
Cash Shocks	32	(1)
Data	32	(1)
Extreme Cash Reserves	33	(5)
Cash reserves and Corporate Control	38	(21)
Aggregate Evidence	38	(2)
Probit Analysis of Bidders and Targets	40	(1)
The Probit Model and Definitions of Variables used in the Analysis	40	(1)
Probit Results	41	(3)
Announcement Returns for Bidders	44	(1)
Methodology for Predicting Bidders	44	(1)
Announcement Return Results	45	(5)
Discussion	50	(1)
Operating Performance Before and After the Merger	51	(3)
Evidence from Divestitures	54	(1)
Methodology	54	(2)
Results	56	(1)
Stock-returns During a Cash Build-up	56	(1)
Experimental Design	56	(1)
Results	57	(2)
Conclusions	59	(4)
References	63	(4)
Appendix	67	(10)
A1 Target Run-up and Speed of Execution	67	(2)
A2 Details of the Transactions	69	(2)
A3 Auctions	71	(2)
A4 Success	73	(1)
A5 The Maximum Premium	73	(4)
Index	77