Based on the free cash flow hypothesis, firms should issue Blank______ debt.Multiple choice question.nolessmore

Understanding the Free Cash Flow Hypothesis

The free cash flow hypothesis suggests that firms with high levels of free cash flow may face agency problems, where managers may invest in negative net present value projects rather than returning cash to shareholders. To mitigate these problems, it is beneficial for these firms to reduce their cash holdings.

Correct Option

1. Analysis of Options:
   • The options provided are "no," "less," and "more."
   • The hypothesis implies that firms with excess cash should aim to reduce their free cash flow levels, often by issuing more debt to finance projects or distributions to shareholders.
2. Conclusion:
   • Therefore, firms should issue more debt to leverage their capital structure and alleviate agency issues surrounding free cash flow.

Final Answer

Firms should issue more debt based on the free cash flow hypothesis.