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Agency costs and accounting quality within an all-equity setting: the role of free cash flows and growth opportunities

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Date Issued:
2015
Summary:
I investigate if all-equity firms are a heterogeneous group as it relates to agency costs and accounting quality. All-equity firms are a unique group of firms that choose a “corner solution” as their capital structure. Extant research, supported by well-established theories such as trade-off theory, free cash flow theory, and Jensen’s (1986) control hypothesis, generally conclude that agency conflicts motivate such structure. Research also supports the alternative argument that poor accounting quality makes debt so prohibitive that such firms are driven to this capital structure. I propose that an all-equity structure is not necessarily symptomatic of agency conflicts and poor accounting quality overall. I investigate if different motivations, within an all-equity setting, reflected by free cash flows and growth opportunities, result in different levels of agency cost and accounting quality. By anchoring on theories that link implicit costs of debt to free cash flow levels and growth opportunities, I hypothesize that free cash flows and growth opportunities are strongly linked to the justification or lack thereof for the pursuit of such strategy. I hypothesize and show that firms in the extremes of the free cash flow to growth rate spectrum exhibit significantly different levels of agency cost and accounting quality within the all-equity setting. These results support my main prediction that there exists agency costs and accounting quality differences within the all-equity setting which are associated with free cash flow levels and growth opportunities and that the pessimistic conclusions for pursuing an all-equity strategy reached by prior research should not be generalized to all such firms.
Title: Agency costs and accounting quality within an all-equity setting: the role of free cash flows and growth opportunities.
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Name(s): Cabán, David, author
Kohlbeck, Mark, Thesis advisor
Florida Atlantic University, Degree grantor
College of Business
School of Accounting
Type of Resource: text
Genre: Electronic Thesis Or Dissertation
Date Created: 2015
Date Issued: 2015
Publisher: Florida Atlantic University
Place of Publication: Boca Raton, Fla.
Physical Form: application/pdf
Extent: 99 p.
Language(s): English
Summary: I investigate if all-equity firms are a heterogeneous group as it relates to agency costs and accounting quality. All-equity firms are a unique group of firms that choose a “corner solution” as their capital structure. Extant research, supported by well-established theories such as trade-off theory, free cash flow theory, and Jensen’s (1986) control hypothesis, generally conclude that agency conflicts motivate such structure. Research also supports the alternative argument that poor accounting quality makes debt so prohibitive that such firms are driven to this capital structure. I propose that an all-equity structure is not necessarily symptomatic of agency conflicts and poor accounting quality overall. I investigate if different motivations, within an all-equity setting, reflected by free cash flows and growth opportunities, result in different levels of agency cost and accounting quality. By anchoring on theories that link implicit costs of debt to free cash flow levels and growth opportunities, I hypothesize that free cash flows and growth opportunities are strongly linked to the justification or lack thereof for the pursuit of such strategy. I hypothesize and show that firms in the extremes of the free cash flow to growth rate spectrum exhibit significantly different levels of agency cost and accounting quality within the all-equity setting. These results support my main prediction that there exists agency costs and accounting quality differences within the all-equity setting which are associated with free cash flow levels and growth opportunities and that the pessimistic conclusions for pursuing an all-equity strategy reached by prior research should not be generalized to all such firms.
Identifier: FA00004432 (IID)
Degree granted: Dissertation (Ph.D.)--Florida Atlantic University, 2015
Collection: FAU Electronic Theses and Dissertations Collection
Note(s): Includes bibliography.
Subject(s): Business enterprises -- Valuation
Cash management
Corporations -- Finance
Corporations -- Growth
Financial risk management
Strategic planning
Venture capital
Held by: Florida Atlantic University Libraries
Sublocation: Digital Library
Links: http://purl.flvc.org/fau/fd/FA00004432
Persistent Link to This Record: http://purl.flvc.org/fau/fd/FA00004432
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Owner Institution: FAU
Is Part of Series: Florida Atlantic University Digital Library Collections.