A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns

Larry H.P. Lang · René M. Stulz · Ralph August Walkling

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

We develop a measure of free cash flow using Tobin’s q to distinguish between firms that hav,e good investment opportunities and those that do not. In a sample of successful tender offers, bidder returns are significantly negatively related to cash flow for low q bidders but not for high q bidders: further. the relation between cash Row and bidder returns differs significantly for low q and high q bidders. This result holds for several cash Row measures suggested in the literature and also in multivariate regressions controlling for bidder and contest-specific characteristics. 1.

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1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have

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