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Internal vs External Financing of Acquisitions: Do Managers Squander Retained Profits?
Author(s) -
Dickerson Andrew P.,
Gibson Heather D.,
Tsakalotos Euclid
Publication year - 2000
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00178
Subject(s) - profitability index , investment (military) , business , finance , capital market , investment decisions , control (management) , financial system , monetary economics , economics , behavioral economics , management , politics , political science , law
It is often argued that managers who have control over investment finance are more likely to pursue their own goals while those who have to raise funds externally are effectively monitored by the financial markets. One implication is that externally finances investment should be more profitable than internally financed investment. We focus on investment in acquisitions and show that its negative net impact on profitability (as seen in previous studies) derives from externally, rather than internally, financed acquisitions. Our results therefore do not support the hypothesis that managers squander internal funds on poor investment projects. Indeed, the evidence suggests that capital markets and financial institutions do not appear to generate the anticipated beneficial effects.