Agency cost of free cash flow, capital allocation, and payouts

Harry DeAngelo, Kathleen Kahle and Douglas J. Skinner

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: Jensen’s (1986) analysis of the agency costs of free cash flow radically transformed our understanding of corporate payout policy. This paper details the main pre-Jensen advances in the payout literature, explains how his analysis profoundly altered the way financial economists view payout policy, and discusses prominent regularities that provide real-world texture for understanding the importance of his insights about payout policy. These regularities include: (i) the dominance (measured as a percent of value or earnings) of the public equity markets by firms in the distribution phase of the corporate lifecycle; (ii) changes since the 1980s in aggregate cash payouts, the profitability of payers, payout rates, and the set of firms that dominate the payout supply; and (iii) the recent politicization of share repurchases.

Keywords: Capital allocation; Free cash flow; Payouts; Politicization of finance (search for similar items in EconPapers)
JEL-codes: G30 G32 G35 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001254

DOI: 10.1016/j.jfineco.2025.104117

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