Relationship between Free Cash Flow and Corporate Performance Evidence from the Listed Real Estate Companies in China

Abstract

There is no consensus on the impact of free cash flow upon corporate performance. Based on the data from 2006-2012 of all listed real estate companies in China, authors studied the relationship between the free cash flow and performance of these firms. Using principal component analysis and regression analysis, key financial performance indicators were calculated out of 18 financial performance indicators, and these key indicators of sample companies were correlated to their free cash flow. The results showed that the free cash flow of a company is negatively linear-correlated to its performance, i.e., too much free cash flow will lead the corporate performance to decline. Therefore, the investors and the managers should avoid business inefficient because of too much free cash flow, which triggers the investment risk and loss.