Date of Award

Spring 2009

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Program/Concentration

Business Administration-Finance

Committee Director

Kenneth Yung

Committee Member

Mohammad Najand

Committee Member

Vinod Agarwal

Abstract

This dissertation investigates how earnings quality as an information risk may facilitate our understanding of the choice of payment method in mergers and acquisitions and the value and the level of corporate cash holdings. In a world of asymmetric information and agency problem, Poor earnings quality implies the inadequate supply of relevant and reliable information for investors to monitor and discipline the behavior of firm managers to act in shareholder and stakeholder's best interest.

This study contributes to the literature in three folds. First, I add to the literature by postulating that earnings quality has a significant impact on the choice of payment method in mergers and acquisitions. I hypothesize that M&A payment methods represent a desire by the acquiring firm's manager to strike a balance between protecting personal pecuniary benefits based on the firm's earnings quality (incentive alignment effects), not losing control of the company (entrenchment effects) and reserving cash for the firm's future growth (growth opportunity consideration). Second, by focusing on earnings quality as an information risk, I am able to explain simultaneously that the value of cash holdings could decline and yet firms have incentives to hold more cash. I offer explanations that the two phenomena are not inconsistent with each other and that they could exist at the same time. Third, my study adds to the literature on the determinants of the level of corporate cash holdings. The earnings quality augmented model has significantly smaller prediction errors relative to existing models in predicting the level of corporate cash holdings.

In Essay I, with earnings quality measured in a way to reflect a firm's information risk, I show that acquisition financing is also affected by the acquirer's earnings quality. I find that acquiring firms with poor earnings quality prefer a lower cash payment in acquisitions, but those with low insider ownership stakes prefer cash over stock even if the earnings quality is poor. Unlike previous studies, I find that high insider ownerships of acquiring firms do not have a significant impact on the amount of cash paid in corporate acquisitions.

In Essay II, Using a sample period between 1980 and 2005 for U.S. publicly traded firms, I find that poor earnings quality has a negative impact on the value of corporate cash holdings. I also find that poor earnings quality is positively related to the level of corporate cash holdings. Moreover, the earnings quality augmented model has significantly smaller prediction errors relative to existing models in predicting the level of corporate cash holdings.

DOI

10.25777/t8et-r655

ISBN

9781109113136

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