Harford, Humphrey and Powell have a new paper, Sources of Value Destruction in Acquisitions by Entrenched Managers. One conclusion is pretty straightforward and consistent with my first impression - if managers have excess cash, they tend not to be careful with it. Sounds like a reason for a dividend policy over an acquisition strategy when firms are generating excess cash.
Abstract: Prior work has established that entrenched managers make value-decreasing acquisitions. Here we ask how exactly they destroy that value. We hypothesize that rising equity values loosen financial constraints, much like free cash flow does, allowing entrenched managers to pursue more acquisitions. We further test whether entrenched managers simply overpay for good targets or actually choose targets with lower synergies. We find support for the latter. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, they are particularly active during times of high equity valuation, even though their own equity is not as highly valued as other bidders’ equity. Finally, they choose targets with low synergies, as shown by combined announcement returns and post-merger operating performance.