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Agency Cost under the Restriction of Free Cash Flow

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Author(s): Junhong Chu

Journal: Journal of Service Science and Management
ISSN 1940-9893

Volume: 04;
Issue: 01;
Start page: 79;
Date: 2011;
Original page

Keywords: Capital Structure | Free Cash Flow | Agency Cost | Non-Pecuniary Benefit

ABSTRACT
Agency cost theory is an important branch of capital structural theory. Free cash flow has significant impact on agency cost. The combination of research on these two fields would help to build and extend the theoretical system. Based on agency cost theory, the present study firstly categorized the characteristics of free cash flow as well as the statistical methodologies. Furthermore, the existence of investing free cash flow in agency cost was proved by a model. Then free cash flow was introduced into agency cost theory as restriction, the analysis shows that it will change agency cost, in turn, will have an impact on the relationship between agency cost and capital structure, finally, will influence the optimal capital structure point to maintain the equilibrium. Concretely, with the increasing free cash flow, correspondingly, debt proportion will decrease.

Tango Jona
Tangokurs Rapperswil-Jona

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