Review of Accounting Studies

, Volume 11, Issue 2–3, pp 159–189 | Cite as

Over-investment of free cash flow

  • Scott Richardson


This paper examines the extent of firm level over-investment of free cash flow. Using an accounting-based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost 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 as the presence of activist shareholders, appear to mitigate over-investment.


Free cash flow Over-investment Agency costs 

JEL Classification

G3 M4 



This paper is based on my dissertation at the University of Michigan. I would like to thank members of my dissertation committee: Richard Sloan (Chair), Jerry Davis, Patricia Dechow, Doug Skinner and Matthew Shapiro. I appreciate helpful comments from workshop participants at Boston College, University of California, Berkeley, University of Chicago, Columbia University, Harvard University, MIT, New York University, Northwestern University, University of Pennsylvania, University of Rochester and Stanford University, Mark Bradshaw, Dan Collins, John Core, Julie Cotter, Ilia Dichev, Jef Doyle, Hulya Eraslan, Ray Fisman, Ted Goodman, Raffi Indjejikian, Irene Kim, David Larcker, Charles Lee (editor), Russell Lundholm, Andrew Metrick, David Musto, Venky Nagar, Stephen Penman, Abbie Smith, Gary Solon, Steve Taylor, Irem Tuna, Ross Watts, Peter Wysocki, Stephen Young, an anonymous referee and conference participants at the 2005 Review of Accounting Studies Conference, especially those of Daniel Bergstresser. I would like to recognize financial support from the Paton Scholarship Fund, the Deloitte & Touche Foundation, the Arthur Andersen Foundation and the Michael J. Barrett Dissertation Award from the Institute of Internal Auditors.


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Copyright information

© Springer Science+Business Media, LLC 2006

Authors and Affiliations

  1. 1.Wharton SchoolUniversity of PennsylvaniaPhiladelphiaUSA

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