THE FREE CASH FLOW HYPOTHESIS AND MA TRANSACTIONS BY ACQUIRERS FROM THE EMERGING MARKETS

This study investigates the free cash flow hypothesis to determine whether the free cash flows (FCFs) available to emerging market firms influence them to undertake mergers and acquisitions (M&As) transactions. The study targets acquirer firms from the emerging markets because of the surge in acquisition transactions globally by firms from these countries amid increasing reports of these firms having large amounts of excess cash reserves in anticipation of M&A activities. The study covered 10 years from 2004 to 2013 for 160 listed acquirers from ten (10) selected emerging market countries. Data were gleaned from the Bloomberg Terminal, an M&A database acclaimed to be one of the world's reliable sources of deal information while the probit regression technique was employed. The probit model is considered powerful just like the logit technique and well suited than the OLS when the purpose of a research study is to establish the probability of an event such as M&A occurring. The probit regression model employed in this study is estimated through the use of the maximum likelihood estimation technique. The study finds evidence of a positive relationship between the FCFs of acquirers from the emerging markets and the execution of M&As, which suggests that the FCFs of these acquirer firms are more likely to influence them to undertake M&A deals. The debt levels of these firms are also more likely to impact the acquirers' M&A investment decisions. However, ROAs representing their profitability levels are less likely to motivate these acquirers to execute M&As. Further, the total assets and Tobin's q denoting the acquirers' sizes and growth opportunities respectively do not in any way serve as motivating factors in their decisions regarding M&A executions under the free cash flow hypothesis. As a policy implication, managers or boards should enact policies that will ensure proper use of any free cash available to firms so that they will be channeled to more rewarding investment projects. Lastly, the board of firms should institute measures that will prevent the practice of leaving firms' free cash flows at the discretion of managers to help reduce agency costs issues usually associated with M&A transactions.