Jensen (1986) provided the first insight into agency theory and his discussions on this topic raised many fundamental questions in the research literature, one of which is the free cash flow hypothesis. Jensen (1986) defined free cash flow as net cash flows in excess of those required to finance all projects that have a positive net present value when discounted at the relevant cost of capital. Chen et. al (2011) found free cash flow as an indicator of overinvestment. Theoretically, free cash flow is financial resources that management has the discretion to allocate. This is why they are also called idle cash flow. Additionally, Jensen (1986) also argued that the presence of significant free cash flow has consequences. This would lead to internal insufficiency and waste of corporate resources, leading to agency costs that would weigh on shareholder wealth. As proof, Jensen (1993) conducted an empirical study of the agency problem and the required rate of return of American companies in the 1980s. The result of the study made it possible to assert that free cash flow is responsible of the fall in US corporate investment returns in the 1980s to the required rate of return. Say no to plagiarism. Get a custom essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayThe free cash flow theory suggested by Jensen states that greater internal cash flow allows managers to avoid controlling the walk. Drobetz et al. (2010) argue that managers do not tend to pay cash such as dividends and are motivated to invest, even when there is no investment with a positive net present value. This theory shows how managers are driven to raise funds in order to increase the resources under their control and to gain power of judgment and discernment over the company's investment decisions. Thus, they act using company funds in order to avoid presenting detailed information to the capital market, even though it is possible that managers invest in projects that may have negative effects on the wealth of the company. shareholders (Ferreira et al., 2004). The role of free cash flow on decisions related to investment activities and financing has been widely studied in the existing literature. Most of this research supported Jensen's theory and confirmed agency problems in firms with excessive cash flow. Previous research aimed to reduce free cash flow agency cost problems. Dividends and debt are the most important mechanisms in the existing literature to counter agency problems related to free cash flow. Myers (1997), Agrawal and Knoeber (1996), and Yilei (2006) found that an increase in debt can create a mechanism to combat the agency problem caused by free cash flow. Fleming, Heaney, and McCosker (2005) also echo this argument and cite some advantages of using debt financing to control and reduce agency costs. Grossman and Hart (1982) and Williams (1987) proposed the argument that greater financial leverage can exert influence on managers and reduce agency costs via the threat of liquidation, which can lead to personal losses in terms.