Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

LITERATURE REVIEW 
Free Cash Flow and Cash Financing 
Free cash flow has been postulated as having an influence on the use of cash financing in acquisitions
(Jensen, 1988). Large amounts of free cash flow may lead firms to finance acquisitions with cash. Marin (1996) 
presented a uni-variate analysis and found a significant positive linear relationship between cash financing and the 
free cash flow of acquiring firms, but he did not control for the specific characteristics of individual firms such as 
growth opportunities, debt ratio and size.
Another reason that managers may prefer to finance acquisitions with cash is that they have previously 
accumulated cash to give the firm financial slack and the ability to escape future capital market constraints 
(Eisinger, 2005).