Jensen's free cash flow theory produces numerous merger-related predictions. Existing empirical evidence is consistent with many of the predictions of the free cash flow theory, though little has been done to test this theory. This dissertation contributes to the understanding of the role that free cash flow plays in acquisitions. Different measures of free cash flow are investigated. / This dissertation addresses two specific issues. The first issue is the ability of free cash flow to explain consummated mergers. This is accomplished by determining whether free cash flow is matched (according to Jensen's theory) or mismatched between acquiring and acquired firms. Results indicate that free cash flow does play a role in the pairing of merger participants; however, the predictions of free cash flow theory are not supported. The inability to support Jensen's free cash flow theory may result from other factors not controlled for in this analysis. / The second issue is whether free cash flow can be used to explain firms that are acquired. This is accomplished by estimating a logit model for a sample consisting of acquired and non-acquired firms that includes free cash flow proxies and other variables. Free cash flow, growth, size, and exchange listing are observed to be characteristics that distinguish acquired firms from non-acquired firms. A model that includes a free cash flow measure relative to the industry is able to correctly predict 71.3 percent of acquired firms and 59.7 percent of all firms in the holdout sample. / The conclusions from the two issues addressed indicate that free cash flow does have a significant effect on merger activity. However, results do not support the predictions of Jensen's free cash flow theory of takeovers. An extension of this study would be to evaluate the abnormal returns of portfolios formed by free cash flow based models. Future research should also investigate whether free cash flow measures can explain the wealth effects observed for merger participants at the merger announcement date. / Source: Dissertation Abstracts International, Volume: 51-09, Section: A, page: 3168. / Major Professor: Pamela P. Peterson. / Thesis (Ph.D.)--The Florida State University, 1990.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_78296 |
| Contributors | Huffman, Stephen Phillip., Florida State University |
| Source Sets | Florida State University |
| Language | English |
| Detected Language | English |
| Type | Text |
| Format | 274 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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