WHAT DO FIRMS DO WITH CASH WINDFALLS

Suppose that a firm receives a cash windfall which does not change its investment opportunity set or, equivalently, its marginal Tobin's Q. What will this firm do with the money? We provide empirical answers to this question using a sample of eleven firms with such windfalls in t he form of a won or settled lawsuit. We examine a variety of decisions of the firm to shed light on alternative theories of corporate financ ing and investment. Our evidence is broadly inconsistent with the perf ect capital markets model. The results need to be stretched considerab ly to fit the asymmetric information model in which managers act in th e interest of shareholders. The evidence supports the agency model of managerial behavior, in which managers try to ensure the long-run surv ival and independence of the firms with themselves at the helm.