Universal Journal of Accounting and Finance Vol. 2(1), pp. 1 - 8
DOI: 10.13189/ujaf.2014.020101
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Agency Costs of Free Cash Flow and Bidders’ Long-run Takeover Performance

Lu Lin ¹, Dan Lin ^2,*
1 Department of Public Finance and Taxation, Takming University of Science and Technology, 11451, Taipei, Taiwan
² Department of Banking and Finance, Takming University of Science and Technology, 11451, Taipei, Taiwan

ABSTRACT

This study investigates the relevance of Jensen’s (1986) free cash flow theory to the market for corporate control in Australia. We introduce two proxies of free cash flow, excess cash holdings and excess accounting cash flow and test the relationship between the level of excess cash and bidders’ long-run post-acquisition performance. Results indicate that the level of excess cash holdings does not provide a significant explanation for the cross-sectional variation in long-run post-acquisition performance. Results from the flow measure of cash indicate that the acquisitions carried out by bidders with excess accounting cash flow are not value-decreasing. This finding is contrary to the free cash flow hypothesis proposed by Jensen (1986).

KEYWORDS
Cash Holdings, Takeover, Acquisition, Long-run Performance, Free Cash Flow

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Lu Lin , Dan Lin , "Agency Costs of Free Cash Flow and Bidders’ Long-run Takeover Performance," Universal Journal of Accounting and Finance, Vol. 2, No. 1, pp. 1 - 8, 2014. DOI: 10.13189/ujaf.2014.020101.

(b). APA Format:
Lu Lin , Dan Lin (2014). Agency Costs of Free Cash Flow and Bidders’ Long-run Takeover Performance. Universal Journal of Accounting and Finance, 2(1), 1 - 8. DOI: 10.13189/ujaf.2014.020101.