This paper investigates the phenomenon of over-investment of free cash flow in firms. Using an accounting-based framework, the author measures free cash flow and over-investment, finding that over-investment is concentrated in firms with the highest levels of free cash flow, consistent with agency cost explanations. The study also examines the relationship between firms' governance structures and over-investment, suggesting that certain governance structures, such as the presence of activist shareholders, can mitigate over-investment. The empirical analysis decomposes total investment expenditure into required and new investment components, and further breaks down new investment into over-investment in negative NPV projects and expected investment. The findings indicate a positive association between over-investment and free cash flow for firms with positive free cash flow, supporting the agency cost explanation.This paper investigates the phenomenon of over-investment of free cash flow in firms. Using an accounting-based framework, the author measures free cash flow and over-investment, finding that over-investment is concentrated in firms with the highest levels of free cash flow, consistent with agency cost explanations. The study also examines the relationship between firms' governance structures and over-investment, suggesting that certain governance structures, such as the presence of activist shareholders, can mitigate over-investment. The empirical analysis decomposes total investment expenditure into required and new investment components, and further breaks down new investment into over-investment in negative NPV projects and expected investment. The findings indicate a positive association between over-investment and free cash flow for firms with positive free cash flow, supporting the agency cost explanation.