OVERINVESTMENT, TOBINS-Q AND GAINS FROM FOREIGN ACQUISITIONS

U.S. acquisitions of foreign firms, show that bidder abnormal returns are substantially higher for high q bidders than low q bidders; further, bidder returns are significantly and inversely related to free cash now for low q bidders but not for high q bidders. There is also evidence that financial markets reward more the initial than subsequent foreign investments of value maximizing U.S. multinational firms. Finally, bidder returns are found to be higher when foreign acquisitions take place in low-tax-rate jurisdictions; in addition, the results show that the 1986 Tax Reform Act exerted a negative effect on bidder returns.