Agency Cost of Free Cash Flow, CorporateFinance, and Takeovers

ArXiv ID: ssrn-99580 “View on arXiv”

Authors: Unknown

Abstract

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Keywords: Unknown

Complexity vs Empirical Score

• Math Complexity: 1.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Philosophers
• Why: The paper presents a theoretical agency-cost framework with minimal formal mathematical modeling, relying on conceptual arguments and qualitative reasoning. Empirical support is primarily drawn from existing literature reviews and event studies without detailed backtestable data or implementation specifics.

  flowchart TD
    G["Research Goal: How does free cash flow affect agency costs and takeovers?"]
    --> M["Methodology: Empirical Analysis using Regression & Event Studies"]
    --> D["Data: Industrial Firms (1951-1986)<br/>Variables: Q-ratio, Free Cash Flow, Leverage"]
    --> C["Computation: Estimating Cost of Capital, Regressing Investment vs. Cash Flow, Analyzing Takeover Probabilities"]
    --> O1["Outcome: FCF in low-growth firms leads to overinvestment and lower value"]
    --> O2["Outcome: Takeovers act as disciplinary mechanism for agency costs"]
    --> O3["Outcome: Debt restructuring mitigates agency costs of free cash flow"]