This study examines how financial flexibility affects the short-term performance of firms following outbound M&A announcements. Further, the role of business group affiliation is also investigated in the context of emerging markets.
Using the event study method, we analyse cumulative abnormal returns (CAR) due to the announcement of outbound M&A. Financial flexibility is measured through the cash-to-current liabilities ratio, and business group affiliation acts as a moderating variable. Regression analysis is used to assess the effects, with robustness checks performed using multiple event windows and logistic regression.
The results show that high financial flexibility is negatively associated with short-term stock performance following outbound M&A announcements, suggesting investor concerns over inefficient capital allocation or agency costs. However, this negative effect is significantly moderated by business group affiliation, which enhances investor confidence by providing oversight and efficient capital deployment mechanisms. This study shows that financial flexibility acts as a performance-management lever shaping short-term market outcomes.
The empirical setting of the paper is restricted to emerging economies and to a certain time period. The findings of the study can be more generalized by testing the study in more varied contexts.
Managers should exercise caution in maintaining excessive liquidity without clear investment plans, as markets may penalize perceived capital hoarding. Firms affiliated with business groups may leverage internal governance structures to counteract the negative perceptions of cash holdings and enhance acquisition credibility.
This study contributes to the literature by empirically validating the dual role of financial flexibility in cross-border M&A performance within the emerging market context. It also offers novel evidence on how business group affiliation can strategically mitigate adverse investor reactions, extending agency and resource-based theories in international business research.
