Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers¶
Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 76(2), 323-329.
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Mechanisms¶
- Retained Earnings or Resource Pool
- … are the ones every reserve invites: idle hoarding — a pool that grows for its own sake earns nothing and carries a real opportunity cost — and the agency cost of a large discretionary reserve, where money sitting available tempts low-return "empire-building" that would never survive external funding discipline.
This sourceExplains that managers with substantial free cash flow can fund low-return expansion that external capital-market discipline would constrain.
- … are the ones every reserve invites: idle hoarding — a pool that grows for its own sake earns nothing and carries a real opportunity cost — and the agency cost of a large discretionary reserve, where money sitting available tempts low-return "empire-building" that would never survive external funding discipline.
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