Analysing the Impacts of Free Cash Flow, Agency Cost and Firm Performance in Public Listed Companies in Malaysia

Noraina Mazuin Sapuan,Akrom Omonov,Muhammad Ashraf Fauzi,Norwazli Abdul Wahab

doi:10.15282/jgi.5.1.2021.7061

Noraina Mazuin Sapuan, Akrom Omonov + Show 2 more

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https://doi.org/10.15282/jgi.5.1.2021.7061

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Abstract

This study intended to examine the relationship between free cash flow and agency costs towards firm performance based on the data from 350 public listed companies in Malaysia. The data was collected from year 2005 to 2015. There is a need to re-examine the free cash flow hypothesis and the agency theory based on Malaysian data as the results from previous studies shown a mix results.The findings shown free cash flow is significantly giving positive impact on firm performance. This result is contradict to free cash flow hypothesis, but it can occur due to, when the availability of investments opportunities that can be generated when firm more free cash flow that later able to increase firm performance. Meanwhile, total asset turnover has a positive impact on return on asset. However, the operating expenses ratio demonstrates that the operating expenses ratio has a negative impact on return on asset. The mix findings of agency cost are supported by previous studies.

Highlights

The major financial scandals such as Enron Corporation, WorldCom, and Waste Management called into doubt the accuracy and trustworthiness of accounting data
There is a need to re-examine the free cash flow hypothesis and the agency theory based on Malaysian data as the results from previous studies shown a mix results.The findings shown free cash flow is significantly giving positive impact on firm performance
Based on previous empirical studies, we propose the empirical model as follows: ROAit = Β0+ Β1FCFit + Β2TATit + Β3OERit + ε ROEit = Β0+ Β1FCFit + Β2TATit + Β3OERit + ε Where Return on asset (ROA) is the return on assets; return on equity (ROE) is the return of equity; FCF is a free cash flow; OER is an operating expenses ratio and TAT is a total asset turnover

Summary

Introduction

The major financial scandals such as Enron Corporation, WorldCom, and Waste Management called into doubt the accuracy and trustworthiness of accounting data. This has led to the establishment and integrity of the governance structure in providing information openness, protecting investors from manipulation, and generating strong economic certainties and the company's actual performance. The deception comprises the management of stock data as well as the fabrication of board member signatures. The accounting or finance department does not thoroughly review their financial statement, resulting in deception in their company's financial report. The free cash flow has received more attention as a statistic that is less manipulated by managers

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