Over-investment of free cash flow
Review of Accounting Studies · 2006 · Volume 11 · Issue 2
DOI: 10.1007/s11142-006-9012-1
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.
Keywords
Free cash flow, Over-investment, Agency costs
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