Relationship Between Free Cash Flows and Corporate Governance Levels in the Light of Agency Theory

Glaysson Aguilar De Araújo,Lara Alves Corrêa,Bruna Camargos Avelino,João Estevão Barbosa Neto,Valéria Gama Fully Bressan

doi:10.16930/2237-7662202132062

Abstract

This research analyzes the relationship between free cash flows (FCFs) and the different levels of Corporate Governance present in the Brazilian stock market. To this end, the sample was composed of 212 Brazilian publicly traded companies listed on Brasil, Bolsa, Balcão [B]³, in the period from 2010 to 2018. The methodology consisted of estimating a regression for panel data, using the random effects model, estimating by generalized least square (GLS) and assuming adjustments for autocorrelation and robust standard errors for heteroscedasticity. The results found, for the sample studied, suggest that Corporate Governance levels are positively related to the FCFs. In synergy, when compared to the Traditional level of [B]³, companies listed on the Novo Mercado and Level 2 levels tend to present higher FCF values. In addition, the larger the size of the companies and the higher their return on equity, the higher their FCFs tend to be, just as companies in stages of maturity tend to present lower FCF values. The relevance of this research is based on analyzing, in a stock market subject to imperfections, factors that may affect decisions about the level of cash maintenance of companies, more specifically by evaluating how Corporate Governance mechanisms relate to the theory of FCFs, in a context of potential conflict of interest.

Highlights

In the context of the modern business environment, corporations have undergone significant changes, as the corporate structure of companies, previously concentrated, is pulverized in several shareholders
This research analyzes the relationship between free cash flows (FCFs) and the different levels of Corporate Governance present in the Brazilian stock market
The results found, for the sample studied, suggest that Corporate Governance levels are positively related to the FCFs

Summary

Introduction

In the context of the modern business environment, corporations have undergone significant changes, as the corporate structure of companies, previously concentrated, is pulverized in several shareholders. Initially exercised by the capital holders, has been delegated to others, who manage the capital invested by shareholders (Martin, Santos & Dias Filho, 2004) In this scenario, the foundations of the Agency Theory stand out, in which Jensen and Meckling Corporate managers are the shareholders’ agents, which may cause a relationship full of conflicting interests between shareholders and managers, and the latter may act aiming at their personal interests to take advantage in the management of companies Under this view, one of the tools that can be used by managers is the Free Cash Flow (FCF), considered as the set of available funds, after financing all projects with positive net present value, updated at the opportunity cost of capital (Jensen, 1986)

Objectives

Methods

Results