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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.

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