Daisy Luna, and
Kyungyeon (Rachel) Koh, PhD
This research project examines the effect of cash windfalls on corporate investment activities and financial performance. We specifically utilize the accounting data on gains arising from legal settlements reported on the 10-K financial statements. Settlement awards properly represent sudden, largely unanticipated cash inflows that can be used at the discretion of the managers. While the modern theory of the firm offers some predictions as to how firms use this cash, empirical findings will shed light on the consistency between theory and practice. Our project updates and extends a seminal paper by Blanchard, Lopez-de-Salines, and Shleifer (BLS 1994), which studies the implications of receiving windfalls; and incorporates the latest developments in behavioral finance. In our main results, our sample of 87 firms between 2011-2015 exhibit a statistically significant increase in the investment expenditures after settlement windfalls, while showing a minimal increase in borrowing and minimal change in cash and profitability.