Agency Conflicts and the Marginal Value of Capital Expenditure in Australian Listed Companies

James Butchers, Gurmeet Singh Bhabra, Harjeet Singh Bhabra () and Anindya Sen ()
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James Butchers: Goldman Sachs, Auckland, New Zealand
Gurmeet Singh Bhabra: Griffith Business School, Griffith University, Nathan Campus, QLD 4111, Australia
Harjeet Singh Bhabra: Sobey School of Business Saint Mary’s University, 923 Robie Street, Halifax Nova Scotia B3H 3C3, Canada
Anindya Sen: University of Otago, New Zealand

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 01, 1-31

Abstract: We examine the value implications of Jensen’s free cash flow hypothesis for a sample of Australian listed companies. Consistent with the US evidence in Masulis, R, C Wang and F Xie (2009). Agency problems at dual-class companies. Journal of Finance, 64(4), 1697–1727, we find that the marginal value of corporate capital expenditures in Australian listed companies is inversely related to the magnitude of agency conflicts arising out of the use of free cash flows. Our results suggest that firms where managers have a greater ability to extract private benefits and are therefore more likely to maximize their own private benefits rather than shareholder wealth will suffer from a lower perceived valuation of their capital investments. Our findings are robust to alternative proxies for relative cash flows and growth opportunities and also hold over multiple sub-periods and industry groupings.

Keywords: Capital expenditure; firm value; agency conflicts (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500016

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