Abstract

http://ssrn.com/abstract=8294
 


 



Free Cash Flow, Optimal Contracting, and Takeovers


Eitan Goldman


Indiana University - Kelley School of Business - Department of Finance

Christopher S. Jones


University of Southern California - Marshall School of Business - Finance and Business Economics Department

Ron Kaniel


University of Rochester - Simon Business School; CEPR

Undated

Rodney L. White Center Working Paper No. 3-97

Abstract:     
A commonly held view in the financial and economic literature is that "free cash flow is bad" in the sense that, given the opportunity, shareholders would always choose to minimize its existence. This view of the world has motivated economists such as Jensen (1988, 1993) to conclude that takeovers, to the extent that they are driven by an overinvestment problem, are beneficial because they both facilitate ex post divertiture and also pose an ex ante threat on managers who overinvest. In this paper we challenge these widely-held beliefs and show that not only might shareholders optimally choose to allow for the existence of free cash flow in the future, but also that the existence of takeovers may actually exacerbate the problem of overinvestment rather than help resolve it.

JEL Classification: G31, G34

working papers series


Not Available For Download

Date posted: April 21, 1997  

Suggested Citation

Goldman, Eitan and Jones, Christopher S. and Kaniel, Ron, Free Cash Flow, Optimal Contracting, and Takeovers (Undated). Rodney L. White Center Working Paper No. 3-97. Available at SSRN: http://ssrn.com/abstract=8294

Contact Information

Eitan Goldman
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Christopher S. Jones (Contact Author)
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
Ron Kaniel
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
HOME PAGE: http://rkaniel.simon.rochester.edu
CEPR ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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