The Impact of Free Cash Flow on Market Value of Firm

Abstract

This paper constitutes an attempt to investigate the relationship between Free Cash Flow to Equity (FCFE) and the firm's market value of the pharmaceutical sector of Jordan by using a valuation technique, wherein the rift between theory and practice still need to be accommodated taking in consideration the relationship of FCFE, Net Income, Net Capital Expenditure, Working Capital and Debt Position. This paper uses panel data covering the period 2004-2010. The determination of a company's market value is a difficult decision, taking into account several antagonistic factors, such as risk of debt and capital expenditure, in times when the economic environment in which the company operates is unstable, therefore the choice among the ideal equation of FCF to Equity can affect the market value of the firm as much as profit rate can. The results show that the market values of a firm are assessed by the Free Cash Flow to Equity. Our result is in accordance with the hypothesis that FCF to Equity has significant positive effect on the stock market. Our findings add to the understanding of the determinants of the market value of firms.