"In a world of perfect capital markets there would be no association between firm level investing activities and internally generated cash flows. If a firm needed additional cash to finance an investment activity it would simply raise that cash from external capital markets. If the firm had excess cash beyond that needed to fund available positive NPV projects (including options on future investment) it would distribute free cash flow to external markets. Firms do not, however, operate in such a world. There are a variety of capital market frictions that impede the ability of management to raise cash from external capital markets. In addition, there are significant transaction costs associated with monitoring management to ensure that free cash flow is indeed distributed to external capital markets. In equilibrium, these capital market frictions can serve as a support for a positive association between firm investing activities and internally generated cash flow."
Quote Details
Added by wikiquote-import-bot
Unverified quote
0 likes
Original Language: English
Available Languages (1)
Sources
Scott Richardson, "Over-investment of free cash flow." Review of accounting studies 11.2-3 (2006): 159-189.
https://en.wikiquote.org/wiki/Cash_flow
Revision History
No revisions have been submitted for this quote.
Categories
Cash flow
13 quotes on TrueQuotesView all quotes by Cash flow →
Related Quotes
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business dur…"
"The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are …"
"Gambling is a kind of tax: a tax on stupidity. A tax on greed. Some money changes hands at random, but the net cash f…"
"60 Minutes is the most successful television series of all time, measured by almost any standard, not the least being…"
"Focusing on cash flow is the best way to determine whether the proposed project is feasible."
"The ability to accurately predict cash flow is the best, most universal, and most consistent standard for financial m…"
"From a more theoretical viewpoint, one can focus on the nexus between the present and the future. A financial instrum…"
"The central question for positive financial economics is valuation – what is the value today of a set of future prosp…"
"Market valuations can differ substantially and persistently from the rational expectation of the present value of cas…"
"The three most dreaded words in the English language are 'negative cash flow'."