The effect of excess cash on bidder announcement returns during crises

Abstract

This study demonstrates the effect of excess cash holdings on bidder announcement returns and the change in this effect during economic downturns. I study the U.S. M&A market during the financial crisis of 2008 and the COVID-19 pandemic and find that the change in the excess cash effect is different in both crises. In line with previous research, I find a negative effect of excess cash on announcement returns in most sample periods, however, I find this effect to be slightly reversed during and after the coronavirus pandemic. The negative excess cash effect has previously been explained by the agency theory of free cash flow (Jensen, 1986). I discuss my findings that are in line with this theory and attempt to find explanations for the differences using alternative theories such as the precautionary motive of cash holdings.