The free cash flow hypothesis predicts that

Question

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The free cash flow hypothesis suggests that firms with excess cash flow are likely to invest in projects with negative net present values unless mechanisms are in place to prevent such behavior. Dividend increases (A) can signal the firm's strong financial health and commitment to returning value to shareholders, which is viewed positively. Firms in industries with large cash flows (B) are expected to have higher dividend payout ratios as a way to distribute excess cash and reduce the free cash flow available for potentially wasteful spending. Managerial compensation tied to value-maximizing dividend policies (C) can align managers' interests with those of shareholders, encouraging them to make decisions that maximize shareholder value, including prudent dividend policies.

The Free Cash Flow Hypothesis Predicts That