自由现金流下的过度投资外文翻译.docx

1、自由现金流下的过度投资外文翻译自由现金流下的过度投资【外文翻译】自由现金流下的过度投资【外文翻译】本科毕业论文(设计) 文 翻 译 外 原文: Over-investment of free cash flow Abstract This paper examines the extent of firm level over-investment of fre cash flow. Using an accounting-based framework to measure over-investment and free cash flow, I find evidence that, c

2、onsistent with agencycost 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

3、as the presence of activist shareholders, appear to mitigate over-investment. Introduction This paper examines firm investing decisions in the presence of free cash flow. In theory, firm level investment should not be related to internally generated cash flows (Modigliani & Miller, 1958). However, p

4、rior research has docu-mented a positive relation between investment expenditure and cash flow ., Hubbard, 1998). There are two interpretations for this positive relation. First, the positive relation is a manifestation of an agency problem, where managers in firms with free cash flow engage in wast

5、eful expenditure ., Jensen 1986; Stulz 1990). When managersobjectives differ from those of shareholders, the presence of internally generated cash flow in excess of that required to maintain existing assets in place and finance new positive NPV projects creates the potential for those funds to be sq

6、uandered. Second, the positive relation reflects capital market imperfections, where costly externalfinancing creates the potential for internally generated cash flows to expand the feasible investment opportunity set ., Fazzari, Hubbard, & Petersen, 1988; Hubbard, 1998). This paper focuses on utili

7、zing accounting information to better measure the constructs of free cash flow and over-investment, thereby allowing a more powerful test of the agency-based explanation for why firm level investment is related to internally generated cash flows. In doing so, this paper is the first to offer large s

8、ample evidence of over-investment of free cash flow. Prior research, such as Blanchard, Lopez-di-Silanes, and Vishny (1994), document excessive investment and acquisition activity for eleven firms that experience a large cash windfall due to a legal settlement, Harford (1999) finds using a sample of

9、 487 takeover bids, that cash-rich firms are more likely to make acquisitions that subsequently experience abnormal declines in operating performance, and Bates (2005) finds for a sample of 400 subsidiary sales from 1990 to 1998 that firms who retain cash tend to invest more, relative to industry pe

10、ers. This paper extends these small sample findings by showing that over-investment of free cash flow is a systematic phenomenon across all types of investment expenditure. The empirical analysis proceeds in two stages. First, the paper uses an accounting-based framework to measure both free cash fl

11、ow and over-investment. Free cash flow is defined as cash flow beyond what is necessary to maintain assets in place and to finance expected new investments. Over-investment is defined as investment expenditure beyond that required to maintain assets in place and to finance expected new investments i

12、n positive NPV projects. To measure over-investment, I decompose total investment expenditure into two components: (i) required investment expenditure to maintain assets in place, and (ii) new investment expenditure. I then decompose new investment expenditure into over-investment in negative NPV pr

13、ojects and expected investment expenditure, where the latter varies with the firms growth opportunities, financing constraints, industry affiliation and other factors. Under the agency cost explanation, management has the potential to squander free cash flow only when free cash flow is positive. At

14、the other end of the spectrum, firms with negative free cash flow can only squander cash if they are able to raise “cheap” capital. This is less likely to occur because these firms need to be able to raise financing and thereby place themselves under the scrutiny of external markets (DeAngelo, DeAng

15、elo, & Stulz, 2004; Jensen, 1986). Consistent with the agency cost explanation, I find a positive association between over-investment and free cash flow for firms with positive free cash flow. For a sample of 58,053 firm-years during the period 19882002, I find that for firms with positive free cash

16、 flow the average firm over-invests 20% of its free cash flow. Furthermore, I document that the majority of free cash flow is retained in the form of financial assets. The average firm in my sample retains 41% of its free cash flow as either cash or marketable securities. There is little evidence th

17、at free cash flow is distributed to external debt holders or shareholders. Finding an association between over-investment and free cash flow is consistent with recent research documenting poor future performance following firm level investment activity. For example, Titman, Wei, and Xie (2004) and F

18、airfield, Whisenant, and Yohn (2003) show that firms with extensive capital investment activity and growth in net operating assets respectively, experience inferior future stock returns. Furthermore, Dechow, Richardson, and Sloan (2005) find that cash flows retained within the firm (either capitaliz

19、ed through accruals or “invested” in financial assets) are associated with lower future operating performance and future stock returns. This performance relation is consistent with the over-investment of free cash flows documented in this paper. The second set of empirical analyses examine whether g

20、overnance structures are effective in mitigating over-investment. Prior research has examined the impact of a variety of governance structures on firm valuation and the quality of managerial decision making (see Brown & Caylor, 2004; Gompers, Ishii, & Metrick, 2003; Larcker, Richardson, & Tuna, 2005

21、 for detailed summaries). Collectively, the ability of cross-sectional variation in governance structures to explain firm value and/or firm decision making is relatively weak. Consistent with this, I find evidence that out of a large set of governance measures only a few are related to over-investme

22、nt. For example, firms with activist shareholders and certain anti-takeover provisions are less likely to over-invest their free cash flow. 1. Free cash flow and over-investment This section describes in detail the various theories supporting a positive relation between investment expenditure and ca

23、sh flow and then develops measures of free cash flow and over-investment that can be used to test the agency based explanation. . Explanations for a positive relation between investment expenditure and cash flow . In a world of perfect capital markets there would be no association between firm level

24、 investing activities and internally generated cash a firm needed additional cash to finance an investment activity it would simply raise that cash from external capital the firm had excess cash beyond that needed to fund available positive NPV projects (including options on future investment) it wo

25、uld distribute free cash flow to external markets. Firms do not, however, operate in such a are a variety of capital market frictions that impede the ability of management to raise cash from external capital markets. In addition,there are significant transaction costs associated with monitoring mana

26、gement to ensure that free cash flow is indeed distributed to external capital equilibrium,these capital market frictions can serve as a support for a positive association between firm investing activities and internally generated cash flow. The agency cost explanation introduced by Jensen (1986) an

27、d Stulz (1990) suggests that monitoring difficulty creates the potential for management to spend internally generated cash flow on projects that are beneficial from a management perspective but costly from a shareholder perspective(the free cash flow hypothesis).Several papers have investigated the

28、implications of the free cash flow hypothesis on firm investment activity. For example, Lamont (1997) and Berger and Hann (2003) find evidence consistent with cash rich segments cross-subsidizing more poorly performing segments in diversified firms. However, the evidence in these papers could also b

29、e consistent with market frictions inhibiting the ability of the firm to raise capital externally and not necessarily an indication of over-investment. Related evidence can also be found in Harford (1999) and Opler, Pinkowitz, Stulz, and Williamson (1999, 2001). Harford uses a sample of 487 takeover

30、 bids to document that cash rich firms are more likely to make acquisitions and these “cash rich” acquisitions are followed by abnormal declines in operating performance. Opler et al.(1999) find some evidence that companies with excess cash (measured using balance sheet cash information) have higher

31、 capital expenditures, and spend more on acquisitions,even when they appear to have poor investment opportunities (as measured by Tobins Q). Perhaps the most direct evidence on the over-investment of free cash flow is the analysis in Blanchard et al. (1994). They find that eleven firms with windfall

32、 legal settlements appear to engage in wasteful expenditure. Collectively,prior research is suggestive of an agency-based explanation supporting the positive relation between investment and internally generated cash flow. However, these papers are based on relatively small samples and do not measure

33、 over-investment or free cash flow ,the findings of earlier work may not be generalizable to larger samples nor is it directly attributable to the agency cost explanation. More generally, a criticism of the literature examining the relation between investment and cash flow is that finding a positive association may