Excess Cash holdings and Acquisitions: A study on Nordic firms

Abstract

By adapting a well-recognized model for estimating normal cash holdings, this study examines if Nordic public firms with excess cash have a higher likelihood of performing acquisitions. Given that firms have access to capital markets, firms should be able to fund positive net present value projects regardless of current cash levels. Literature does, however, show that firms with excess cash have a higher likelihood of performing acquisitions and that the acquisitions on average are value decreasing for shareholders. Previous research has focused on the U.S. hence our study contributes by studying a region which has not been comprehensively covered. We find that Nordic firms with excess cash have a statistically significant, at a 5% significance level, higher likelihood of becoming an acquirer in the subsequent year. Robustness tests with various types of excess cash variables also indicate higher acquisition likelihood among firm years with excess cash, which strengthens the validity of our results. In addition to acquisition likelihood, we also study the development and distribution of cash holdings among Nordic public firms for the time-period 2004 to 2018. We observe that the mean, median, and aggregated cash ratio fell heavily in connection to the financial crisis 2008. Thereafter, the cash ratios reversed, which indicates a mean-reverting process. We also observe that the mean cash ratio has increased by 10%, the median cash ratio has decreased by 8%, and the aggregated cash ratio has decreased by 28% between 2004 and 2018. However, there has been a substantial net inflow of public firms, an increase by 91%, between 2004 and 2018, which limits the comparability between years.