An Empirical Analysis Of M&A Performance In China Based On The Free Cash Flow Hypothesis

Merger&Acquisition (M&A) is an economic method for corporations to expand and restructure by getting other assets' ownership or equity-control, and it is expected to optimize M&A firms' resource distribution. Along with the deepening of reform policy and expeditious development of economy, more and more listed companies in our country adjust their industrial structure and optimize the resource distribution by M&A. So, what's the effect of M&A in China's security market? And have such companies got the excess increasing by M&A? The investigation will be propitious to realize market-oriented and material M&A in China.By introducing the Free Cash Flow Hypothesis, we expected to inspect the real performance of M&A in China, and to verify the application of this theory for listed companies in our country simutaniously. In this paper, we investigate 241 listed companies that occured M&A in 2003 and 2004 by using the Event-Study Methodology. And we also test the financial performance of this samples. In order to mesure the FCF accuratly, we use this method to judge whether the company had good opprtunities for investment: to test the Tobin's q for two consecutive years.We find that: (1)the agency cost of free cash flow indeed has already existed in China;(2)the payment of cash dividend can not alleviate the free cash flow problem;(3)firm leverage is weak-form efficiency to the FCF problem, but the investor can not realize that;(4)paying by cash fail to alleviate the free cash flow problem. In a word, our fingdings support the core concept of the Hypothesis, but weak for its inferences.