Work Sheet 10. Free cash flow and takeovers. According to Michael Jensen, shareholders are concerned about leaving too much free cash flow inside the firm, and prefer paying excess cash as dividends than piling it up inside the firm. When shareholders see too much cash inside the firm, they will attempt a takeover to replace entrenched management. So, theory predicts that the level of takeover threat influences firms' level of free cash flow. 35 30 Delaware Non Delaware 25 20 Free cash flowl asset (%) 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Based on the plot above, what is the net effect of takeover threat on firms free cash flow (.e., how much does the presence of takeover threat increases or decreases free cash flow divided by assets)? Describe what method you used and why it measures the impact of takeover threat on free cash flow (e.g., what was the legal change how it changed the takeover threat, and how this impacts free cash flow). 1. Net effect of takeover threat on free cash flow (divided by assets } The disappearance of takeover threat increases the free cash flow divided by assets by 2. What method was used? 3. Why it measures net effect of takeover threat on free cash flow Work Sheet 10. Free cash flow and takeovers. According to Michael Jensen, shareholders are concerned about leaving too much free cash flow inside the firm, and prefer paying excess cash as dividends than piling it up inside the firm. When shareholders see too much cash inside the firm, they will attempt a takeover to replace entrenched management. So, theory predicts that the level of takeover threat influences firms' level of free cash flow. 35 30 Delaware Non Delaware 25 20 Free cash flowl asset (%) 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Based on the plot above, what is the net effect of takeover threat on firms free cash flow (.e., how much does the presence of takeover threat increases or decreases free cash flow divided by assets)? Describe what method you used and why it measures the impact of takeover threat on free cash flow (e.g., what was the legal change how it changed the takeover threat, and how this impacts free cash flow). 1. Net effect of takeover threat on free cash flow (divided by assets } The disappearance of takeover threat increases the free cash flow divided by assets by 2. What method was used? 3. Why it measures net effect of takeover threat on free cash flow