Does an Acquiring Firm’s Cash Reserve Have a Negative Wealth Effect in the U.K.? Shortened title: Cash Reserve Effects for Bidders in the U.K

Using a sample of U.K. bidder companies from 1984 through 2007, we find that announcement returns are better for bidders of higher excess cash reserve. This suggests that acquisitions by high excess cash reserve bidders are not necessarily value-decreasing as is suggested by the agency theory and found in the U.S. market. Managers may need cash to ensure that all potential good investment opportunities are financed internally if not externally due to high costs of external funds. Moreover, a company of higher excess cash reserve is more likely to be a bidder, and a bidder of higher excess cash reserve has better operating performance than a low-excess-cash-reserve bidder in postacquisition years. Overall, our results suggest that, in the U.K., growth opportunities dominate agency conflicts as the underlying mechanism that drives the wealth effects of corporate cash reserve in acquisitions. This possibly can be explained by the fact that the U.K. regulation of takeovers attempts to ensure that actions taken by managements should be preceded by close shareholder scrutiny.