Long-term Debts and Overinvestment in Cash and Capital Expenditures: An Agency Perspective

Abstract

Managers' tendency to overinvestment is one of the agency costs that due to conflict of Interests between managements and shareholders the firms are encountered with. Whilesuchactivities increase personal interestsof managements, they will reduce the firm value. Increasing the debt is a potential solution for the overinvestment problem. This study investigates the impact of long term debts on overinvestment (with respect to cash and capital expenditures) and also, it examines the impact of growth opportunities on this overinvestment.The statistical society of this research includes companies accepted in Tehran Stock Exchange (TSE) andthe sample consists of 90 firms which are selected based on some constraints for the period of 1379 to 1389. Regression analysis and t-test are utilized to examine the hypothses.The resultsshow that there is a negative and significant relationship between long-term debt changes and overinvestment (in cash and capital expenditure) and the mean of overinvestment in cash and capital expenditure in firm with less growth opportunities, is more

Keywords

• overinvestment in cash
• overinvestment in capital expenditures
• long-term debts
• agency costs
• freecash flows
• growth opportunities