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An Analysis of Joint Effects of Investment Opportunity Set, Free Cash Flows and Size on Corporate Debt Policy

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  • Jaggi, Bikki
  • Gul, Ferdinand A

Abstract

This study, based on a sample of 1869 observations from 1989 to 1993 for non-regulated U.S. firms, examines the association between investment opportunity set (IOS), free cash flows (FCF) and debt, and also tests whether firm size acts as a moderating variable on this association. The results show that there is a significantly positive association between FCF and debt for low IOS firms, which provide support to Jensen's (1986) "control hypothesis". The results also show that the positive association between debt and high FCF for low IOS firms is more pronounced for large firms, suggesting that the firm size serves as a moderating variable on the association. Copyright 1999 by Kluwer Academic Publishers

Suggested Citation

  • Jaggi, Bikki & Gul, Ferdinand A, 1999. "An Analysis of Joint Effects of Investment Opportunity Set, Free Cash Flows and Size on Corporate Debt Policy," Review of Quantitative Finance and Accounting, Springer, vol. 12(4), pages 371-381, June.
    • Handle: RePEc:kap:rqfnac:v:12:y:1999:i:4:p:371-81
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    Cited by:

    1. Fadhila HAMZA & Anis JARBOUI, 2012. "Investor’s Commitment Bias and Escalation of Firm’s Investment Decision," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(2), pages 327-345, December.
    2. Namazi, Mohammad & Shokrolahi, Ahmad & Sadeghzadeh Maharluie, Mohammad, 2016. "Detecting and ranking cash flow risk factors via artificial neural networks technique," Journal of Business Research, Elsevier, vol. 69(5), pages 1801-1806.
    3. Mohamed Ali Azouzi & Anis Jarboui, 2014. "CEO Emotional Intelligence and Firms’ Financial Policies. Bayesian Network Method," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(1), March.
    4. Muhammad Asif Joyo & Nawaz Ahmad & Ghulam Mustafa Shaikh, 2017. "The Role Of Business Risk And Non Debt Tax Shields On Capital Structure: A Study Based On Cement Sector In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(2), pages 36-49.
    5. Jun Hyeok Choi & Saerona Kim & D.-H. Yang, 2019. "Do Managers Pay CSR for Private Motivation? A Dividend Tax Cut Case in Korea," Sustainability, MDPI, vol. 11(15), pages 1-17, July.
    6. Mohamed Ali Azouzi & Anis Jarboui, 2018. "Managerial Optimism Level and Investment Decision: Decision Tree Analysis," International Journal of Social Science Studies, Redfame publishing, vol. 6(1), pages 107-123, January.
    7. Suratno & Syahril Djaddang & Imam Ghozali, 2017. "The Role of Business Risk and Non Debt Tax Shields to Debt to Equity Ratio on Pharmacy Listed Companies in Indonesia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 73-80.
    8. Linn, Scott C. & Park, Daniel, 2005. "Outside director compensation policy and the investment opportunity set," Journal of Corporate Finance, Elsevier, vol. 11(4), pages 680-715, September.
    9. Hoang Thi Thuy & Duong Thi Nhan & Chen MiaoJian, 2021. "Cash Holdings and Investment Levels: An Empirical Study from Listed Companies on Viet Nam’s Stock Exchange," International Journal of Business and Management, Canadian Center of Science and Education, vol. 14(3), pages 1-98, July.
    10. Hamza Fadhila & Azouzi Mohamed Ali & Jarboui Anis, 2014. "Governance mechanisms, managerial’s commitment bias and firm’s investment decision escalation: Failure of firm?s crises communication: Bayesian network method," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 4(2), pages 125-149, February.
    11. Dilawar Ahmad Bhat & Udayan Chanda & Anil K. Bhat, 2023. "Does Firm Size Influence Leverage? Evidence from India," Global Business Review, International Management Institute, vol. 24(1), pages 21-30, February.
    12. Murat Kizildag & Ozgur Ozdemir, 2017. "Underlying factors of ups and downs in financial leverage overtime," Tourism Economics, , vol. 23(6), pages 1321-1342, September.
    13. Shumi Akhtar, 2005. "The Determinants of Capital Structure for Australian Multinational and Domestic Corporations," Australian Journal of Management, Australian School of Business, vol. 30(2), pages 321-341, December.
    14. Erdinc Karadeniz & Serkan Yilmaz Kandir & Omer Iskenderoglu & Yildirim Beyazit Onal, 2011. "Firm Size and Capital Structure Decisions: Evidence From Turkish Lodging Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 1(1), pages 1-11.
    15. F. Voulgaris & D. Asteriou & G. Agiomirgianakis, 2004. "Size and Determinants of Capital Structure in the Greek Manufacturing Sector," International Review of Applied Economics, Taylor & Francis Journals, vol. 18(2), pages 247-262.
    16. Muhammad Asif Joyo & Nawaz Ahmad & Ghulam Mustafa Shaikh, 2017. "The Role Of Business Risk And Non Debt Tax Shields On Capital Structure: A Study Based On Cement Sector In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(2), pages 13-14.

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