Over-investment of free cash flow

Scott Richardson ()
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Scott Richardson: University of Pennsylvania

Review of Accounting Studies, 2006, vol. 11, issue 2, No 2, 159-189

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: G3 M4 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (29)

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DOI: 10.1007/s11142-006-9012-1

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