Cash holdings and the bargaining power of R&D-intensive targets

• Published in: Review of quantitative finance and accounting Vol. 49; no. 4; pp. 885 - 923
• Main Authors: Upadhyay, Arun, Zeng, Hongchao
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.11.2017; Springer Nature B.V
• Subjects: Accounting/Auditing; Bargaining; Bids; Cash flow; Companies; Corporate Finance; Econometrics; Economics and Finance; Finance; Financing; Operations Research/Decision Theory; Original Research; Power; Premiums; R&D; Research & development; Transactions; Corporate cash holdings; R&D intensity; G30; Bargaining power; G34; Takeover premiums; Announcement-period CARs; Ex ante takeover probability
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-016-0611-z

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.