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A Direct Test of the Free Cash Flow Hypothesis: Evidence from Real Estate Transactions

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  • Yongqiang Chu

    (University of South Carolina)

  • Peng Liu

    (Cornell University)

Abstract

This paper tests (Jensen The American Economic Review, 76, 323–329 1986) free cash flow hypothesis using data on real estate transactions. We find that firms with either higher free cash flow or higher cash reserve pay more fore real estate, which is consistent with the free cash flow hypothesis. We also find that the agency costs of free cash flow associated with real estate transactions are more severe when firms have lower Tobin’s Q. Furthermore, we find that among the commonly used corporate governance measures, only equity compensation is effective in mitigating the agency problem of free cash flow.

Suggested Citation

  • Yongqiang Chu & Peng Liu, 2016. "A Direct Test of the Free Cash Flow Hypothesis: Evidence from Real Estate Transactions," The Journal of Real Estate Finance and Economics, Springer, vol. 52(4), pages 543-558, May.
    • Handle: RePEc:kap:jrefec:v:52:y:2016:i:4:d:10.1007_s11146-016-9551-6
    DOI: 10.1007/s11146-016-9551-6
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    Cited by:

    1. Julia Freybote & Lihong Qian, 2017. "Corporate real estate, stock market valuation and the reputational effects of eco-certification," Journal of Property Research, Taylor & Francis Journals, vol. 34(3), pages 163-180, July.
    2. Piet Eichholtz & Erkan Yönder, 2023. "CEO–CFO team optimism: Commercial real estate transactions and REIT performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(1), pages 103-129, January.
    3. Rebecca Abraham & Venkata Mrudula Bhimavarapu & Zhi Tao & Shailesh Rastogi, 2023. "The Influence of Cash Ownership on Financial Performance: An Examination of Disruptors and Acquirers," JRFM, MDPI, vol. 16(3), pages 1-22, March.

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