Free Cash Flow and Takeover Threats: An Experimental Study

Ryan Oprea

Southern Economic Journal, 2008, vol. 75, issue 2, 351-366

Abstract: A classic theory of corporate governance holds that when cash flow is high and investment opportunities scarce, takeover threats reduce managerial self‐dealing and encourage dividend payment to owners. I conduct laboratory experiments studying the effect of cash flow on self‐dealing and the effect of takeover threats on both agency problems and the optimality of management of cash flows. I find that higher cash flow firms suffer more severe agency problems. Moreover I find that takeover threats reduce these problems in high cash flow firms but not low cash firms. Finally, I find evidence that takeover threats cause managers in low cash flow firms to make myopic withdraws to signal generosity.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/j.2325-8012.2008.tb00908.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:75:y:2008:i:2:p:351-366

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().