The free cash flow hypothesis suggests that firms with excess cash flow are more likely to engage in wasteful spending and suboptimal investment decisions, potentially leading to a decrease in shareholder wealth. This theory posits that when a company generates more cash than it can profitably reinvest, managers might allocate the excess funds in ways that do not maximize firm value, which can hurt shareholders in the long run. Therefore, the effective management of free cash flow is critical for enhancing firm value and ensuring that shareholder interests are prioritized.
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