This paper examines the value effect of working capital management (WCM) for a large sample of US firms over the period 1982-2011. Taking into account omitted variables and reverse causality, we show that the decrease in working capital across time leads to increasing performance. This relationship is driven by firms that have substantial cash unnecessarily tied up in working capital. Importantly, we also show that corporate investment is the channel through which improvement in WCM translates into superior performance. Finally, the value effect of WCM is attenuated during the financial crisis, due to the contraction of the investment opportunity set. JEL classification: G31, G32Keywords: Working capital management, Performance, Investment, Reverse causality, Risk *Corresponding author. Tel.: +49 261 6509 224. E-mail addresses: nihat.aktas@whu.edu (N. Aktas), ettore.croci@unicatt.it (E. Croci), d.petmezas@surrey.ac.uk (D. Petmezas). AcknowledgementWe thank Yakov Amihud, Hubert de la Bruslerie, Lorenzo Caprio, Riccardo Calcagno, Andrey Golubov, Ulrich Hofbaur, Alexander Kempf, François Larmande, Oguzhan Ozbas, Alain Schatt, Oktay Tas, Nickolaos Travlos, and seminar participants at the University of Cologne, University of Lausanne, and Istanbul Technical University for their comments and suggestions. We are grateful to Rongbing Huang and Inessa Love for sharing with us their codes for estimating the long-differencing technique and the PVAR model, respectively. All remaining errors are our own. 1

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Most gains in takeovers accrue to targets, suggesting the presence of strong competition among acquirers. Yet recent literature documents a seemingly contradictory fact; a large majority of all takeovers occur after one-on-one negotiations. We seek to determine whether the acquirers in such friendly deals are totally insulated from competitive pressures. Realizing that the mere possibility of an open auction might threaten negotiations, we emphasize the role of ex ante competition, the likelihood that rival bidders will appear. Using several proxies, we find that ex ante competition increases the bid premium for directly-negotiated deals. We show also that auction costs reduce the bid premium required by targets in negotiations.

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Most gains in takeovers accrue to targets, suggesting the presence of strong competition among acquirers. Yet recent literature documents a seemingly contradictory fact; a large majority of all takeovers occur after one-on-one negotiations. We seek to determine whether the acquirers in such friendly deals are totally insulated from competitive pressures. Realizing that the mere possibility of an open auction might threaten negotiations, we emphasize the role of ex ante competition, the likelihood that rival bidders will appear. Using several proxies, we find that ex ante competition increases the bid premium for directly-negotiated deals. We show also that auction costs reduce the bid premium required by targets in negotiations.

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