Is Excess Free Cash Flow Over-Invested? Evidence from Borsa İstanbul

Yıl 2017, Cilt: 39 Sayı: 1, 1 - 17, 19.07.2017

Levent Ataünal Aslı Aybars

https://doi.org/10.14780/muiibd.329721

Öz

In a perfect capital market, investments should not be related to cash flows of the firm. Investments

should only be determined by the amount of renewal investments required and growth opportunities

available to the firm. Contrarily, due to the conflicts of interest between the managers and the

shareholders, the theory on agency costs and free cash flow hypothesis propose that managers are

inclined to over-use free cash flow, which is in excess of value-adding investments. It is claimed that

firms invest their extra free cash flow on projects with returns below cost of capital of the firm. Some

prior studies made on the topic implied the validity of this hypothesis. In other words, firm’s resources

might be wasted by means of over-investing. This study, based on a panel data of 154 Borsa Istanbul

firms observed between 2005-2015, confirmed that firms over-invest when there is free cash flow

available in excess of growth opportunities and dividends. Prior studies have used mostly regression

models or Tobin’s q to estimate investment prospects of the firm. However, this study adopted a direct

method to estimate investment opportunities available to the firm.

Anahtar Kelimeler

Serbest nakit akışı hipotezi, Vekâlet teorisi, Temsil maliyeti, Fazla Yatırım

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