中文3780字
外文翻译
原文：
Over-investment of free cash flow
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, prior research has documented a positive relation between investment expenditure and cash flow (e.g., 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 wasteful expenditure (e.g.,Jensen 1986; Stulz 1990). When managers‟ objectives 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 squandered. Second, the positive relation reflects capital market imperfections, where costly external financing creates the potential for internally generated cash flows to expand the feasible investment opportunity set (e.g., Fazzari, Hubbard, & Petersen,1988; Hubbard, 1998).
This paper focuses on utilizing 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 sample 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 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 peers. 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 flow 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 t
o finance expected new investments in 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 projects and expected investment expenditure, where the latter varies with the firm‟s 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 the other end of the spectrum, firms with negativ e 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, & 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 1988–2002, I find that for firms with positive free cash 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 that 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 Fairfield, 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 capitalized 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.
documented翻译The second set of empirical analyses examine whether governance 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. 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-investment. For example, firms with activist shareholders and certain anti-takeover provisions are less likely to over-invest their free cash flow.
The next section develops testable hypotheses concerning the relation between free cash flow and over-investment. Section 2 describes the sample selection and variable measurement. Section discuss
es empirical results for the over-investment of free cash flow. Section 4 contains empirical analysis examining the link between corporate governance and the over-investment of free cash flow, while section 5 concludes.
1. Free cash flow and over-investment
This section describes in detail the various theories supporting a positive relation between investment expenditure and cash flow and then develops measures of free cash flow and over-investment that can be used to test the agency based explanation.
1.1. 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 investing activities and internally generated cash flows. If a firm needed additional cash to finance an investment activity it would simply raise that cash from external capital markets. If the firm had excess cash beyond that needed to fund available positive NPV projects (including options on future investment) it would distribute free cash flow to external markets. Firms do not, however, operate in such a world. There 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
management to ensure that free cash flow is indeed distributed to external capital markets. In 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) and 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 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 be 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 bids to document that ca sh 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 capital expenditures, and spend m
ore on acquisitions, even when they appear to have poor investment opportunities (as measured by Tobin‟s 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 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 over-investment or free cash flow directly. Thus, 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 merely indicate that cash flows serve as an effective proxy for investment opportunities. My aim is to better measure the constructs of free cash flow and over-investment by incorporating an accounting-based measure of growth opportunities, and test whether the relation is evident in a large sample of firms.
In addition to prior empirical work on agency based explanations for the link between firm level investment and internally generated free cash flow, there exists a stream of research dedicated to exa
mining the role of financing constraints (e.g., Fazzari et al. (1988), Hoshi, Kashyap, and Scharfstein (1991), Fazzari and Petersen (1993), Whited (1992) and Hubbard (1998)). Myers and Majluf (1984) suggest that information asymmetries increase the cost of capital for firms forced to raise external finance, thereby reducing the feasible investment. Thus, in the presence of internally generated cash flow, such firms will invest more in response to the lower cost of capital.
Some early work in this area examined the sensitivity of investment to cash flow for high versus low dividend paying firms (Fazzari et al., 1988), comparing differing organizational structures where the ability to raise external financing was easier/harder (Hoshi, Kashyap and Scharfstein, 1991, with Japanese keiretsu firms) and debt constraints (Whited, 1992). These papers find evidence of greater sensitivity of investment to cash flow for sets of firms which appeared to be financially constrained (e.g., low dividend paying firms, high debt firms and firms with limited access to banks). However, more recent research casts doubt on the earlier results.

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