Agency costs of free cash flow and conditional conservatism

Ha, Joohyung,(2019), Agency costs of free cash flow and conditional conservatism. , Advances in Accounting, UNSPECIFIED

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This study investigates whether agency costs of free cash flow (FCF) are associated with conditional conservatism. Prior research documents that conditional conservatism improves ex ante efficient investment decisions and facilitates ex post monitoring of managers’ investment decisions. As conditional conservatism can provide protection from possible managerial expropriation, the demand for conditional conservatism should increase with the agency costs of FCF. Using excess cash as a proxy for the agency costs of FCF, I provide evidence that firms with higher agency costs of FCF incorporate losses in a timelier manner relative to gains compared to their counterparts. Additionally, the association between excess cash and conditional conservatism predictably varies with the presence of alternative monitoring mechanisms that mitigate FCF problems, such as debt or dividend payouts or repurchases. Further investigation suggests that greater conservatismis associatedwith a lower likelihood of overinvestment among firms bearing high agency costs of FCF, demonstrating the ability of conservatism to reduce agency costs of FCF
Keywords : Agency costs Conditional conservatism Cash holdings Free cash flow, UNSPECIFIED
Journal or Publication Title: Advances in Accounting
Volume: 46
Item Type: Article
Subjects: Akuntansi
Depositing User: Users 8 not found.
Date Deposited: 26 Dec 2019 03:10
Last Modified: 26 Dec 2019 03:10

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