Agency Costs of Free Cash Flows and Investments in Business Sustainability

45 Pages Posted: 20 Jul 2017

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Deakin University - Department of Accounting

Anthony C. Ng

Monash University; Monash University

Date Written: Jan 20, 2017

Abstract

This paper extends the literature on the determinants of environment, social and governance (ESG) dimensions of sustainability investment by examining whether low growth firms with the agency problems of high free cash flows (FCF) (Jensen, 1986) have more incentives to invest in ESG sustainability. We use sustainability performance as a proxy for sustainability investment, since sustainability performance does not emerge naturally and firms must have invested in sustainability to attain performance. The results indicate that firms with high FCF are associated with higher levels of ESG sustainability investment, after controlling for dividend distributions, debt interest payments and investment expenditure for maintaining asset-in-place and acquiring new investment. We also find that high FCF firms with high investments in ESG sustainability are associated with higher market returns than similar firms with low investments in ESG.

Keywords: Business Sustainability Investment, Corporate Investment, Free Cash Flows, Agency Costs

JEL Classification: G14, G31, M14

Suggested Citation

Gul, Ferdinand A. and Ng, Anthony C., Agency Costs of Free Cash Flows and Investments in Business Sustainability (Jan 20, 2017). Available at SSRN: https://ssrn.com/abstract=3003629 or http://dx.doi.org/10.2139/ssrn.3003629

Ferdinand A. Gul

Deakin University - Department of Accounting ( email )

Melbourne
Australia

Anthony C. Ng (Contact Author)

Monash University ( email )

Caulfield Campus
900 Dandenong Road
Caulfield East, VIC 3145
Australia

Monash University ( email )

Caulfield Campus
900 Dandenong Road
Caulfield East, VIC 3145
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
104
Abstract Views
757
rank
254,897
PlumX Metrics