Hypothesis 1: Pre-acquisition performance of Chinese company (the acquirer) and its cross-border acquisition performance are positively related.

4.2 Free Cash Flow

Agency theory describes that the relationship between shareholders and managers as a principal-agent relationship. The principal and agent have different and often conflict interests. A manager considers his own interest first when making decisions that may not at the best of interest of shareholders. Jensen & Meckling (1983)define a firm as a nexus of contracts, contending that agency cost is unavoidable in public companies.

One kind of agency costs is associated with the magnitude of free cash flow that refers to the amount of cash leftin the company after covering the need of all investment projects with positive net present value. Large amounts of free cash flow can cause higher agency cost when corporate governance of acquiring company is imperfect. When a company has a large free cash flow but no or just a little debt, shareholders and managers may face a serious conflict in interests regarding pidend policy. In order to maximize their interests, managers prefer not distributing the free cash as pidend payout and to keep free cash flow within the company. Therefore they can use that cash not only for their personal private benefits or over-investment, but also for compensation of possible losses in the future(Jensen, 1986). If there is no good control system in place to ensure efficiency in operations, free cash flow may lead to high agency cost. Under that circumstance, acquisition cannot be a sound decision. On the other hand, free cash flow is redistributable financial resource thus released in acquisitions, and put it into more productive use.

Jensen also predicts the characteristics of the free cash flow concentrated industries, showing that the free cashflow can be a serious problem for companies with large amounts of free cash flow and low growth prospect, and especially essential for companies doomed to shrink. These companies face the most serious situation for wasting cash on investments in non profitable projects.

We argue free cash flow can cause the same agency cost in China’s publicly listed companies. Dividend payout lowers the resources under manager’s control; therefore managers prefer using free cash flow to invest instead of pidend payment, even though such investment may not generate positive returns to shareholders. Therefore, we hypothesize that acquiring company with sufficient cash flow before acquisition has poor post acquisition performance.

6 Results

Finally, organizational age is in slightly positive relation to overseas acquisition performance of Chinese firms, which is consistent with the previous hypothesis, that is, organization learning enables firms to improve and develop new technologies and knowledge, promoting the creation of intangible assets, which is the basis of continuing competitiveness. The longer a firm's history, the more changes it has experienced, and the adaptable it is to reforms, which is good for a firm to pursue cross border acquisitions and improve its performance. However, whether this experience transfer can happen largely depends on the firm's ability to learn and reflect as well as the similarity between previous experience and current acquisitions.

 These results are useful to understand cross border acquisitions of Chinese firms, but because of the limited sample size and exploratory nature of Chinese firms'  cross-boarder M&A activities, the impact on the overall performance of the acquiring companies may be hard to interpret. We have to be cause to generalize these results.