FCF agency costs, earnings management, and investor monitoring

Richard Chung · Michael A. Firth · Jeong‐Bon Kim

51 citations0/0 files storedCorporate Ownership and Control

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

Free cash flow has been identified as having the potential to be a major agency cost where managers make expenditures that have negative NPVs. This agency problem reduces profitability and lowers stock market valuations. We argue that firms with high free cash flow and poor growth opportunities will suffer from the free cash flow agency problem. Our results are consistent with expectations and show that firms with high free cash flow and low growth are associated with low long term profitability. We also find that managers use income-decreasing accruals when a firm has high free cash flow agency costs. This earnings management is motivated by managers’ desire to shift profits to future years when the full impact of the sub-optimum investments hits earnings. The evidence supports Fudenberg and Tirole’s (1995) managerial self-interest hypothesis. Consistent with the institutional investor monitoring hypothesis, we show that institutional shareholders act to deter managers from using negative discretionary accruals when free cash flow agency costs are potentially high.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 51 citations exist upstream.

References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973Risk, Return, and Equilibrium: Empirical Tests 1996Agency costs of free cash flow, corporate finance, and takeovers 1986Large Shareholders and Corporate Control 1991Earnings Management During Import Relief Investigations 1995Detecting Earnings Management.1990Additional evidence on equity ownership and corporate value 1990Managerial discretion and optimal financing policies

Cited by

2010Determinants of sell‐side financial analysts’ use of non‐financial information 2017Pengaruh Investment Opportunity Set dan Free Cash Flow Pada Kebijakan Dividen dan Nilai Perusahaan 2011Strategic revelation of differences in segment earnings growth 2018Corporate governance and agency theory: Megacable case 2022The impact of cost stickiness on financial reporting: evidence from income smoothing 2014The impact of free cash flows and agency costs on firm performance — An empirical analysis of KSE listed companies of Pakistan

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.