Free Cash Flow Theory
Michael Jensen's 1986 theory that managers and shareholders have CONFLICTING preferences over excess cash: managers prefer to retain it (funds empire-building, prestige acquisitions, perks, avoids capital-market discipline); shareholders prefer to receive it (so they can redeploy to higher-return alternatives). Dividends and committed buyback programs act as COMMITMENT DEVICES — once a firm raises payouts, the political cost of reversing is severe, effectively forcing management to disgorge the cash flow stream. Explains why mature firms with weak investment opportunities create value by raising payouts even when M-M dividend-irrelevance says they should not — the value comes from REDUCING the agency cost of free cash flow.
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Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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