Rahmat Setiawan (2014) Masalah Agensi Free Cash Flow dan Perilaku Moral Hazard (Suatu Tinjauan Teoritis dan Empiris). The 7th NCFB and Doctoral Colloquium 2014: Towards a New Indonesia Business Architecture. pp. 217-225. ISSN 1978-6522

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Abstract

Free cash flow agency problem occurs when there is different interest between insider (manager and controlling shareholder) and outsider (minority shareholder and creditor) in correlated with firm free cash flow. Free cash flow agency problem in a firm is showed by moral hazard behavior done by manager and/or controlling shareholder in using firm free cash flow. The form of the moral hazard behavior is overinvestment activity by using firm free cash flow when the firm has bad investment opportunities. By doing overinvestment, manager and/or controlling shareholder make decision to invest firm free cash flow in unprofitable investment projects, which are investment projects with negative NPV. The manager and/or controlling shareholder motivation in doing overinvestment is to make the firm grow bigger than normal size, although ignore the firm profitability. The bigger firm size, the bigger firm resources controlled by manager and/or controlling shareholder, so that the bigger opportunity that manager and/or controlling manager use the firm resources for their self interest. Several empirical studies in Indonesia done by Santoso (2003), Mutamimah (2006) and Siregar (2006) showed empirical evidences about free cash flow agency problem between controlling shareholder and minority shareholder in Indonesia firms. The empirical studies in other developing countries, for examples: Bena and Hanousek (2008) in Czech Republic and Chen et al. (2009) in China, and the empirical studies in developed countries for examples: Lang et al. (1991) and Lang and Litzenberger (1989) also showed that free cash flow agency problem accurs in other countries, both in developing and developed countries.

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