Over-investment of free cash flow

Over-investment of free cash flow This paper examines the extent of firm level over-investment of free cash flow. Using an accounting-based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms’ governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Over-investment of free cash flow

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Publisher
Kluwer Academic Publishers-Plenum Publishers
Copyright
Copyright © 2006 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-006-9012-1
Publisher site
See Article on Publisher Site

Abstract

This paper examines the extent of firm level over-investment of free cash flow. Using an accounting-based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms’ governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jun 23, 2006

References

  • Asset sales, investment opportunities, and the use of proceeds
    Bates, T. W.
  • The impact of SFAS 131 on Information and Monitoring
    Berger, P. G.; Hann, R.
  • An empirical assessment of the residual income valuation model
    Dechow, P. M.; Hutton, A. P.; Sloan, R. G.
  • Industry costs of equity
    Fama, E. F.; French, K. R.
  • Do managerial objectives drive bad acquisitions?
    Morck, R.; Shleifer, A.; Vishny, R. W.
  • The determinants and implications of corporate cash holdings
    Opler, T.; Pinkowitz, L.; Stulz, R.; Williamson, R.
  • The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs
    Opler, T.; Titman, S.

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