Empirical Investigation of Free Cash Flow Hypothesis: Evidence from Jordanian Capital Market

Abstract

This study aims to investigate free cash flow hypothesis proposed by Jensen (1986). Data pertaining to 102 non-financial firms listed on ASE during the period of 1998–2009 are analyzed using pooled and panel data methods. Contrary to Jensen (1986) proposition, we found that debt and dividend are not substitute techniques for mitigating agency costs of free cash flow in the Jordanian capital market, rather, they are complementary to each other. However, debt is used more than dividend for stability consideration of dividend policy where the use of debt and dividend is largely affected by dividend smoothing and leverage target adjustment considerations. Moreover, we found that low growth firms use debt more than dividends.