Over-investment of free cash flow |
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Authors: | Scott Richardson |
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Institution: | 1. Wharton School, University of Pennsylvania, 1314 Steinberg Hall—Dietrich Hall, Philadelphia, PA, 19104-6365, USA
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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. |
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