The Free Cash-Flow Theory Versus Financial Constraints : Investments, Corporate Governance and Soft Budgeting Problems

The supposed preference of firms for internal sources of finances to fund their investments can be explained by either the free cash flow or the financial constraints theories, both stem from asymmetric information. Neither theory was found fully valid by recent research. Using a French data panel, conclusive evidence will be made in favor of the free cash flow theory in special cases. The validity of the free cash flow theory in special cases will bring new issues to light with the introduction of a new definition: capitalistic soft budgeting problems. Through this analysis, the possible interaction between capital market imperfections and general equilibrium will also gain new dimension