Open AccessThe lifecycle of the firm, corporate governance and investment performance
Author(s) -
Jimmy A. Saravia Matus
Publication year - 2014
Publication title -
corporate ownership and control
Language(s) - English
Resource type - Journals
eISSN - 1810-0368
pISSN - 1727-9232
DOI - 10.22495/cocv11i2c1p6
Subject(s) - corporate governance , business , retrenchment , free cash flow , agency cost , agency (philosophy) , investment (military) , cash flow , cash , industrial organization , value (mathematics) , accounting , finance , shareholder , public administration , machine learning , computer science , philosophy , epistemology , politics , political science , law
According to firm lifecycle theory the agency costs of free cash flows are not transitory problems but are a persistent issue for mature firms. This paper extends the theory by suggesting that to neutralize the threat of takeover the controlling parties of maturing firms progressively deploy antitakeover provisions, and this allows them to overinvest safely and prevent retrenchment. Another contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. Empirical results show that as firms mature free cash flows increase, more antitakeover provisions are put into place and negative net present value projects are undertaken.