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A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns

Journal of Financial Economics, Vol. 29, pp. 315-335, 1991

22 Pages Posted: 29 Jul 2011

See all articles by Larry H.P. Lang

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Ralph A. Walkling

Drexel University - Lebow College of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: 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. 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.

Suggested Citation

Lang, Hsien Ping Larry and Walkling, Ralph August and Stulz, Rene M., A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns (1991). Journal of Financial Economics, Vol. 29, pp. 315-335, 1991, Available at SSRN: https://ssrn.com/abstract=917413

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

Ralph August Walkling (Contact Author)

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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