The free cash flow hypothesis predicts that

Question

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The free cash flow hypothesis suggests that firms with significant free cash flow are likely to invest in projects with negative net present values unless mechanisms are in place to prevent such investments. Dividend increases (A) can signal the firm's confidence in its future cash flows, encouraging a positive view from investors. 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 expenditures. Managerial compensation tied to value-maximizing dividend policies (C) can align managers' interests with those of shareholders, encouraging decisions that maximize shareholder value. Therefore, all of the statements (A, B, and C) are consistent with the free cash flow hypothesis, making D the correct answer.

The Free Cash Flow Hypothesis Predicts That