Journal article
A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns
Journal of financial economics, v 29(2), pp 315-335
01 Oct 1991
Abstract
The free cash flow hypothesis advanced by Jensen (1988) states that managers endowed with free cash flow will invest it in negative net present value (NPV) projects rather than pay it out to shareholders. Jensen defines free cash flow as cash flow left after the firm has invested in all available positive NPV projects. This hypothesis is tested on a sample of large investments made by firms, namely decisions to acquire control of other firms through tender offers. A measure of free cash flow is developed using Tobin's q to distinguish between firms that have good investment opportunities and those that do not. In a sample of successful tender offers, bidder returns are significantly negatively related to cash flow for low q bidders but not for high q bidders. Further, the relation between cash flow and bidder returns differs significantly for low q and high q bidders. This result holds for several cash flow measures suggested in the literature and also in multivariate regressions controlling for bidder and contest-specific characteristics.
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Details
- Title
- A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns
- Creators
- Larry LangRene Stulz - The Ohio State UniversityRalph Walkling - The Ohio State University
- Publication Details
- Journal of financial economics, v 29(2), pp 315-335
- Publisher
- Elsevier Sequoia S.A
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Finance
- Web of Science ID
- WOS:A1991GR10800004
- Scopus ID
- 2-s2.0-0040615519
- Other Identifier
- 991021881391304721
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- Collaboration types
- Domestic collaboration
- Web of Science research areas
- Business, Finance
- Economics