A Test of the Control Hypothesis of Bond Creation

Akhigbe, Aigbe; Harikumar, T.

doi:10.1111/j.1468-5957.1995.tb00394.x

Cited by 1 publication

(1 citation statement)

References 21 publications

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“…Thus, cash proceeds from debt may reduce the agency costs of free cash flow, which may result in higher stock returns. Akhigbe and Harikumar (1995) found that the use of cash proceeds from debt to fund capital expenditure and working capital generated abnormal stock returns, while similar cash proceeds used to retire debt failed to significantly influence stock returns.…”

Section: Hypothesis 1bmentioning

confidence: 99%

The Influence of Cash Ownership on Financial Performance: An Examination of Disruptors and Acquirers

Abraham

Bhimavarapu

Tao

et al. 2023

JRFM

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Cash ownership emits a powerful positive signal. We examine four sources of cash in firms, i.e., cash flows, cash holdings, cash proceeds from debt, and cash proceeds from equity. We examine the effects of cash ownership for firms growing by disruption, and firms growing by acquisition. Information signaling theory maintains that free cash flows may be used to increase shareholder wealth. Two-stage least squares regressions determined the impact of cash funding on disruptors and size of acquisition in the first stage, and cash-funded disruption or cash-funded acquisition in the second stage, for a US sample of 832 disruptor firms and 924 acquirers, from 2000–2020. Disruptions funded by cash holdings, cash flow, and cash proceeds from debt, significantly increased stock returns. A size effect was observed, with small disruptors showing significant effects. Acquisitions funded by cash holdings, cash flow, and cash proceeds from debt, significantly increased stock returns and return on assets. Agency costs significantly reduced returns and profits. Results for disruptions and acquisitions support signaling theory with free cash flows signaling higher share prices for both disruptors and acquirers, and higher profits for acquirers.

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Section: Hypothesis 1bmentioning

confidence: 99%