Jensen, Myers-Majluf, Free Cash Flow and the Returns to Bidders

QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Vol. 37 No. 3, Fall 1997

Posted: 21 Jul 1997

See all articles by George M. McCabe

George M. McCabe

University of Nebraska at Lincoln

Ken C. Yook

Johns Hopkins University - Carey Business School

Abstract

Previous research has shown that returns to bidders are significantly negative for stock acquisitions and insignificant although slightly positive for cash acquisitions. Two theories (Jensen and Myers-Majluf) would predict positive returns to bidders in cash acquisitions which use up excess cash flow and slack. This paper investigates bidder returns using these theories and the Lang, Stulz, and Walkling proxy for free cash flow. It finds that cash bidders that have low q and sizable free cash flow and that reinvest a high percentage of this free cash flow have significant positive returns as Jensen's theory predicts. It finds no evidence supporting the Myers- Majluf theory. Cash bidders without Lang, Stulz, and Walkling free cash flow have returns that are negative and essentially indistinguishable from those of stock bidders.

JEL Classification: G34, G32, G12

Suggested Citation

McCabe, George M. and Yook, Ken C., Jensen, Myers-Majluf, Free Cash Flow and the Returns to Bidders. QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Vol. 37 No. 3, Fall 1997, Available at SSRN: https://ssrn.com/abstract=8431

George M. McCabe (Contact Author)

University of Nebraska at Lincoln ( email )

730 N. 14th Street
Lincoln, NE 68588
United States

Ken C. Yook

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
610-725-5248 (Phone)
610-725-5224 (Fax)

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