Corporate cash reserves and acquisitions

Cash-rich firms are more likely than other firms to attempt acquisitions. S tock return evidence shows that acquisitions by cash-rich firms are value d ecreasing. Cash-rich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cash-rich firms are more likely to make diver sifying acquisitions and their targets are less likely to attract other bid ders. Consistent with the stock return evidence, mergers in which the bidde r is cash-rich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanati on for acquisitions by cash-rich firms.