An analysis of joint effects of investment opportunity set, free cash flows and size on corporate debt policy

This study, based on a sample of 1869 observations from 1989 to 1993 for non-regulated U.S. firms, examines the association between investment opportunity set (IOS), free cashflows (FCF) and debt, and also tests whether ®rm size acts as a moderating variable on this association. The results show that there is a significantly positive association between FCF and debt for low IOS firms, which provide support to Jensen's (1986) ``control hypothesis''. The results also show that the positive association between debt and high FCF for low IOS firms is more pronounced for large firms, suggesting that the ®rm size serves as a moderating variable on the association.