Dividend payout ratios as determinants of earnings response coefficients: A test of the free cash flow theory

Kallapur, S (1994) Dividend payout ratios as determinants of earnings response coefficients: A test of the free cash flow theory. Journal of Accounting and Economics, 17 (3). 359 - 375.

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Abstract

This paper tests Jensen's (1986a) free cash flow theory that managers overinvest retained earnings by undertaking negative-NPV projects. The test is based on the theory's implication that earnings response coefficients depend positively on payout ratios. It is supported by the data for a sample of 112 firms over the 1951–1986 period. Another test finds that the returns on retained earnings are lower than proxies for the market's required rate of return, as implied by the free cash flow theory. However, the sample firms' Jensen alphas are reliably positive, suggesting that caution is warranted in interpreting the results.

Affiliation: Indian School of Business
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ORCiD
Kallapur, S
https://orcid.org/0000-0003-2920-6144
Item Type: Article
Additional Information: The research article was published by the author with the affiliation of University of Arizona.
Uncontrolled Keywords: Capital markets, Earnings response coefficients, Agency theory, Free cash flow theory
Subjects: Business and Management
Depositing User: Veeramani R
Date Deposited: 06 Mar 2019 09:21
Last Modified: 13 Mar 2019 09:34
URI: http://eprints.exchange.isb.edu/id/eprint/671
Publisher URL: https://doi.org/10.1016/0165-4101(94)90033-7
Publisher OA policy: http://www.sherpa.ac.uk/romeo/issn/0165-4101/
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