The Market for Corporate Control and Corporate Cash Holdings

Abstract

Conventional wisdom asserts that firms with large cash holdings are likely takeover targets. Using hostile takeover activity from 1985-1994, I find the probability a firm will be acquired decreases with cash. This holds for firms with excess cash as well as those with poor investment opportunities. Cash decreases acquisition probability by deterring potential bids, but does not increase premiums offered when bids occur. Finally, cash decreases after passage of antitakeover legislation. Thus, managers may hold cash to entrench themselves at shareholders' expense. Consequently, the market for corporate control does not monitor corporate cash holdings. Rather, cash may decrease such monitoring.

JEL Classification: G34