Corporate Liquidity, Acquisitions, and Macroeconomic Conditions

Firms hold liquid assets to enhance their ability to invest efficiently when external financing costs are high, especially during poor macroeconomic conditions. Using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014, we study how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles. We find that higher cash holdings increase the likelihood a firm will make an acquisition. Better macroeconomic conditions, which lower the cost of external finance, also increase the likelihood of an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions. The results are consistent with the view that firms choose liquidity levels to insure against poor macroeconomic conditions.