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Agency cost of free cash flow, capital allocation, and payouts

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  • DeAngelo, Harry
  • Kahle, Kathleen
  • Skinner, Douglas J.

Abstract

Jensen’s (1986) analysis of the agency costs of free cash flow radically transformed our understanding of corporate payout policy. This paper details the main pre-Jensen advances in the payout literature, explains how his analysis profoundly altered the way financial economists view payout policy, and discusses prominent regularities that provide real-world texture for understanding the importance of his insights about payout policy. These regularities include: (i) the dominance (measured as a percent of value or earnings) of the public equity markets by firms in the distribution phase of the corporate lifecycle; (ii) changes since the 1980s in aggregate cash payouts, the profitability of payers, payout rates, and the set of firms that dominate the payout supply; and (iii) the recent politicization of share repurchases.

Suggested Citation

  • DeAngelo, Harry & Kahle, Kathleen & Skinner, Douglas J., 2025. "Agency cost of free cash flow, capital allocation, and payouts," Journal of Financial Economics, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001254
    DOI: 10.1016/j.jfineco.2025.104117
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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