Jensen (1986) posits that costly conflicts of interest between managers and shareholders are especially pronounced in companies with substantial amounts of free cash flow. Jensen argues that, all else equal, firms that finance assets with debt will be less prone to this agency problem of...

This paper shows that risk in cash flow and accrual components of earnings is an important determinant of a firm's cost of equity beyond risk in earnings. The paper develops and tests a model that demonstrates how earnings smoothing hinders the ability of earnings to capture firm risk and how...

Richard Miller's reply (2008) to my comment (2008) on his claim (2007) that the standard WACC formula fails to correctly remunerate shareholders and bondholders raises crucial questions on the nature of the project's debt that he considers in his calculations. To clarify this point, I here...