Over-Investment of Free Cash Flow

49 Pages Posted: 21 Feb 2006

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School


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.

Keywords: Free cash flow, investment, governance

JEL Classification: G31, G34, M41

Suggested Citation

Richardson, Scott Anthony, Over-Investment of Free Cash Flow. Review of Accounting Studies, 2006. Available at SSRN: https://ssrn.com/abstract=884229

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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