A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns
22 Pages Posted: 29 Jul 2011
Date Written: 1991
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. In this paper, we test this hypothesis on a sample of large investments made by firms, namely decisions to acquire control of other firms through tender offers.
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