Agency Costs, Managers Optimism and Investment Cash Flow Sensitivity: Evidence from Tehran Stock Exchange

The aim of this study is to investigate the relationship between agency costs, manager's optimism and investment cash flow sensitivity in firms listed in Tehran Stock Exchange (TSE). The population of the study is firms listed in TSE and research sample includes 125 firms listed in TSE which is studied during the period of 2007 to 2011. Arsalan et al. (2006) model is used to measure investment cash flow sensitivity. Three proxies are considered to capture agency costs namely free cash flow, assets turnover, and operating cost to sale. Difference between predicted revenue and actual revenue divided by firm's assets measures managers' optimism. The results of the study show that there is a positive significant relationship between free cash flow and operating cost to sale with investment cash flow sensitivity and there is a negative significant relationship between assets turnover and investment cash flow sensitivity. Finally, the results indicate that, there is a positive significant relationship between manager's optimism and investment cash flow sensitivity.