Do horizontal mergers affect rivals' cash holdings?

This paper examines how firms adjust cash holdings following horizontal mergers in the industry. Using a sample of 16,597 horizontal mergers between US firms from 1984 to 2016, we find that in the three-year period following horizontal mergers, the marginal value of cash decreases for the rivals with lower investment opportunities. Rivals with low Tobin's Q reduce cash while the rivals with high Tobin's Q hold more cash. These results suggest that rival firms adjust cash holdings in a pattern that is more consistent with their investment opportunities. We also examine possible explanations for the rivals' cash adjustments and discuss the rivals' competitive pressure following the horizontal mergers.