FREE CASH FLOW AND INVESTMENT PRECOMMMITMENT

José Filipe Corrêa Guedes
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José Filipe Corrêa Guedes: Faculdade de Ciências Económicas e Empresariais, Universidade Católica Portuguesa

Portuguese Journal of Management Studies, 2000, vol. V, issue 1, 3-22

Abstract: Theories of high leverage based on the argument that debt repayment forces management to disgorge free cash flow ignore the fact that firms´ investment decisions often affect the investment decisions of competitors. This paper shows that when firms interact through their investment decisions, free cash flow in the hands of an investment-prone manager can serve as a strategic weapon. Endowing management with free cash flow precommits the firm to large, predatory investments, which keep rivals away from common investment opportunities. The focus on the precommitment value of free cash flow leads to a number of implications on cross-firm effects that are broadly consistent with existing evidence.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:pjm:journl:v:v:y:2000:i:1:p:3-22

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