A Direct Test of the Free Cash Flow Hypothesis: Evidence from Real Estate Transactions

Yongqiang Chu and Peng Liu ()
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Peng Liu: Cornell University

The Journal of Real Estate Finance and Economics, 2016, vol. 52, issue 4, No 10, 543-558

Abstract: Abstract This paper tests (Jensen The American Economic Review, 76, 323–329 1986) free cash flow hypothesis using data on real estate transactions. We find that firms with either higher free cash flow or higher cash reserve pay more fore real estate, which is consistent with the free cash flow hypothesis. We also find that the agency costs of free cash flow associated with real estate transactions are more severe when firms have lower Tobin’s Q. Furthermore, we find that among the commonly used corporate governance measures, only equity compensation is effective in mitigating the agency problem of free cash flow.

Keywords: Free cash flow hypothesis; Real estate transactions; Corporate governance (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11146-016-9551-6

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