What do Firms do with Cash Windfalls? / Olivier J. Blanchard, Florencio Lopez-de-Silane.

Format:

Book

Author/Creator:

Blanchard, Olivier J.

Contributor:

National Bureau of Economic Research.

Lopez-de-Silane, Florencio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4258.

NBER working paper series no. w4258

Language:

English

Subjects (All):

Corporations--Finance.

Corporations.

Corporations--Cash position.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1993.

Cambridge, Massachusetts : National Bureau of Economic Research, 1993.

Summary:

Suppose that a firm receives a cash windfall which does not change its investment opportunity set, or equivalently its marginal Tobin's Q. What will this firm do with the money? We provide empirical answers to this question using a sample of firms with such windfalls in the form of a won or settled lawsuit. We examine a variety of decisions of the firm to shed light on alternative theories of corporate financing and investment. Our evidence is broadly inconsistent with the perfect capital markets model. The results need to be stretched considerably to fit the asymmetric information model in which managers act in the interest of shareholders. The evidence supports the agency model of managerial behavior, in which managers try to ensure the long run survival and independence of the firms with themselves at the helm.

Notes:

Print version record

January 1993.