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Over-investment of free cash flow

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  • Scott Richardson

    (University of Pennsylvania)

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.

Suggested Citation

  • Scott Richardson, 2006. "Over-investment of free cash flow," Review of Accounting Studies, Springer, vol. 11(2), pages 159-189, September.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:2:d:10.1007_s11142-006-9012-1
    DOI: 10.1007/s11142-006-9012-1
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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