Free Cash Flow Hypothesis Research Articles

Do CSR Firms Make Better Acquisitions? - The Case of Taiwan

This study examines the association between Corporate Social Responsibility (CSR) activities measured by two of Taiwan’s leading publishers, the Commonwealth Magazine and the Global View Magazine, and the acquirer’s short- and long-term performances after the merger announcement in Taiwan. We use CEO compensation and the firm’s free cash flow as the proxies for CEO self-confidence. We find that the acquirer’s CSR engagement is positively associated with its long-term performance but not with its short-term performance. CEO compensation is positively associated with the acquirer’s performance, especially after the mandatory establishment of the remuneration committee for publicly traded firms. However, the acquirer’s free cash flow is found negatively associated with its performance, supporting Jensen’s (Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–329) free cash flow hypothesis or CEO hubris. These findings indicate that the CSR measurements of Commonwealth Magazine and Global View Magazine do provide valuable information for CSR activities and that CSR activities do enhance firm value in the long run. Furthermore, the requirement for the establishment of the remuneration committee does improve the effectiveness of CEO compensation for firm performance in Taiwan.

THE EFFECT OF SHARE REPURCHASE ON THE PERFORMANCE OF COMPANIES LISTED ON BURSA MALAYSIA

The aim of this research is to examine the impact of share repurchase towards the performance of listed companies in Bursa Malaysia. Share repurchase has become significantly popular in recent years. It has been recognized as one of the effective tools to enhance communication between companies and their shareholders. This research consists of two specific objectives; to examine the relationship between repurchases of shares and the performance of listed companies on Bursa Malaysia and to examine the relationship between Share repurchase and return on asset (ROA). This research comprises several theories such as signaling theory, efficient market hypothesis, free cash flow hypothesis as well as substitution hypothesis. In this research, company performance is the dependent variable while the independent variables are known as share repurchase. The impact of independent variable towards dependent variable has been examined in this research. Furthermore, asset turnover, cash flow margin, leverage, and market-to-book ratio of company was the control variable. This research has employed secondary data to examine the effect of share repurchase towards listed company’s performance in Bursa Malaysia. The data was derived from several sources such as Bursa Malaysia official website, annual report of the company as well as DataStream database. Several statistic tests have been carried out to test the objective of research.

Impacts of Free Cash Flow and Agency Cost on Firm Performance

This study aims to examine the effect of free cash flow and agency cost to firm performance. The purpose of this study to provide empirically evidence about the effect of free cash flow and agency cost to firm performance. This study also examines the free cash flow hypothesis developed by Jensen (1986). Recent study about this topic resulting mixed/various result. Free cash flow in this study measured by free cash flow t-1, agency cost proxied by operating expenses ratio. Firm performance divided into three, operational performance measured by ROA, firm value measured by tobin's q ratio, and share return measured by holding period return. This study will conduct on manufacturing companies listed on Indonesian Stock Exchange period of 2017-2021. Sample were selected by purposive random sampling method and finally obtained 396 samples that fulfill the criteria. Data were analyzed using multiple regression analysis. The result show that free cash flow has insignificant positive effect on firm operational performance, firm value and share return. Agency cost has significant negative effect on firm operational performance, firm value and share return. This study provides empirical evidence of the effect agency cost on firm performance and provides contribution to the literature on free cash flow hypothesis topics

Does Internal Fund Create Trouble for Firms? The Effect of Investment and Dividend Policy toward Firm Value

Agency theory occurs when shareholders recruit a manager to manage the company. Both shareholders and managers tend to work in their best interests. The free cash flow hypothesis states that managers tend to use internal funds to invest in an unprofitable project rather than pay a dividend to shareholders. This research investigates whether internal fund available creates trouble (agency conflict) that can reduce the firm value in Indonesia's company by examining the relationship of operating cash flow as the source of internal funds to firm value through investment decision and dividend policy. The research object is the consumer non-cyclical sector listed on Indonesia Stock Exchange from 2015-to 2019. The purposive sampling technique selects forty-seven companies. Panel data was analyzed using two stages least square (2SLS). This research finds that operating cash flow positively affects firm value. Nonetheless, operating cash flow does not affect firm value through investment decisions and dividend policy in Indonesia.

Impact of Dividend and Leverage on Free Cash Flow in The Context of Agency Problem: Evidence from Pakistan

Objective: The purpose of this paper is to study the agency theory problem. To test the free cash flow (FCF) hypothesis to reduce the agency theory in firms operating in Pakistan. Further, this paper gives an overview of financial reporting conditions and corporate governance practices. Design/methodology/approach: This study has applied panel regression on data. It is collected from 2010 to 2017 from companies listed in the Pakistan stock exchange. This paper used the Fixed and Random effect model to test the relationship. The current study collected data from 119 companies from the stock exchange of Pakistan. Findings: We find that the free cash flow hypothesis exists in firms listed in the Pakistan stock exchange. Debt is the more proper approach to reduce the free cash flows in management control than the dividend. Furthermore, we find that capital expenditure adds to the value of the firms. Originality/value: This study is the first analysis of the agency theory problem to measure the effectiveness of the free cash flow (FCF) hypothesis in the context of public sector nonfinancial firms in the Pakistan Stock exchange. The study contributes to the literature of corporate laws, agency theory, and the dividend payment patterns adopted by firms.

Dividend Versus Investment – Cash Flow Allocation

The aim of the article is to find out about the pattern in which operating cash flows are allocated between dividends and investment. We analyzed 419 companies from the Warsaw Stock Exchange and covered the period of 2007–2020 with 4,760 firm-year observations. We prepared regression models for the dividend and investment ratio depending on the company specificity. We found a positive relation between dividends and investment. Additionally, we found that with the increase of operating cash flow, both dividends and investment increase. We think that the best explanation of our findings lies in the free cash flow hypothesis and signaling theory of dividends. Dividends and investment might be a tool to mitigate managerial decisions and at the same time a tool to send a positive signal to the investor about the present and future good financial situation. The results contribute to the literature on firms’ investment- and dividend-cash flow sensitivity and the order of decisions: in a residual dividend policy, investment decisions are made first and the remaining profit is paid out as dividends while another theoretical approach implies that firms decide first on their dividend level, and then make investment decisions as they are reluctant to cut dividends.

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

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.

Executive directors' pay-performance link and board diversity: evidence from high free cash flow and low-growth firms

PurposeThe purpose of this study is to examine whether board diversity can attenuate weaker executive directors' pay-performance link in high free cash flow and low-growth firms (HFCF_LGRW).Design/methodology/approachThis study employed the Malaysian dataset from 2005 till 2016 and the fixed-effect model to investigate the developed hypotheses. The two-stage least squares method (2SLS) is employed to mitigate endogeneity issues.FindingsThis study finds that a positive association between executive directors' pay and firm performance is weaker in HFCF_LGRW firms. However, board diversity, namely ethnic and gender diversity, can mitigate weaker executive directors' pay-performance link, indicating effective monitoring.Originality/valueThis study is among the first to reveal that executive directors' pay-performance link is weaker in firms with HFCF_LGRW growth, consistent with Jensen's (1986) free cash flow hypothesis. However, findings suggest that this agency problem in HFCF_LGRW firms is attenuated by board diversity, namely ethnic and gender diversity. This supports the notion that diversity in corporate boards serves as an effective internal monitor.

Agency Conflicts and the Marginal Value of Capital Expenditure in Australian Listed Companies

We examine the value implications of Jensen’s free cash flow hypothesis for a sample of Australian listed companies. Consistent with the US evidence in Masulis, R, C Wang and F Xie (2009). Agency problems at dual-class companies. Journal of Finance, 64(4), 1697–1727, we find that the marginal value of corporate capital expenditures in Australian listed companies is inversely related to the magnitude of agency conflicts arising out of the use of free cash flows. Our results suggest that firms where managers have a greater ability to extract private benefits and are therefore more likely to maximize their own private benefits rather than shareholder wealth will suffer from a lower perceived valuation of their capital investments. Our findings are robust to alternative proxies for relative cash flows and growth opportunities and also hold over multiple sub-periods and industry groupings.

The Free Cash Flow Hypothesis and M & A Transactions by Acquirers from the Markets

The Free Cash Flow Hypothesis and M & A Transactions by Acquirers from the Markets

Impact of Agency Costs on Financial Performance of Listed Consumer Goods Companies in Nigeria

This paper examined impact of agency costs on financial performance of listed consumer goods companies in Nigeria. The research utilized documentary data collected from annual reports of consumer goods companies in Nigeria for the period of 2007-2016. A panel data regression technique was employed. The study reveals inverse relationship between agency costs and financial performance, indicating that agency costs will lead to a decline in financial performance, if not properly managed. Based on this result the study recommends that managements of listed consumer goods companies in Nigeria should lay down effective rules and regulations that will ensure avoidance of keeping free cash flow at managers’ discretion so that agency costs could be minimized and effectively managed. This could be achieved by complying with the suggestions by free cash flow hypothesis paying it out in the form of cash dividend or committing the firms in to more financial obligations which requires periodic interest payments. There should be critical reviewed before such action are taken by companies in consumer goods industries.

Market effects of private equity placement: Evidence from Chinese equity and bond markets

Research has provided empirical evidence for the stock market reaction toward private placement; however, similar research has not been conducted in terms of the bond market. Using the event study method, we empirically examine the explanatory power of the signaling, free cash flow, and wealth transfer hypotheses based on the reaction of the stock market, bond market, and firm abnormal returns to the private placement announcement. The results show that the stock market has a negative reaction toward private placement, whereas the bond market has a positive reaction. The results also show that the scale of private placement is correlated with the severity of the market reaction. Abnormal returns indicate no significant change both before and after the private placement, and they are unaffected by the scale of private placement. These results are consistent with the wealth transfer hypothesis; however, the market reaction is not attributable to the signaling hypothesis and the free cash flow hypothesis. Extensive research shows that the abnormal returns of private placement change dramatically in non-state-owned enterprises and firms with low credit rating bonds, whereas the bond maturity has no significant impact on the abnormal returns—the wealth transfer effect of private placement is stronger in non-state-owned enterprises and firms with low credit rating bond.

Testing the validity of free cash flow hypothesis: Evidence from Nigeria

Purpose: This study empirically tests the validity of the free cash flow hypothesis among firms quoted on the Nigerian Stock Exchange (NSE) from 2007 to 2017. Research methodology: The study employed a dynamic panel system Generalized Method of Moments (GMM) in analyzing the data generated. Results: the result failed to provide empirical evidence in support of the Jensen free cash flow hypothesis in Nigeria. The equally showed that a high concentration of shareholding in the hand of a few individual increases the amount of dividend paid out to shareholders. The result is however robust using different methods.n Limitations: We focused only on testing the validity of the free cash flow hypothesis proposed by Jensen (1986). Contribution: The study provided empirical evidence that invalidates the propositions of the free cash flow hypothesis among publicly quoted firms in Nigeria. The result is robust using different estimation techniques.n Keywords: Free cash flow hypothesis; Dividend payout

ANALISIS UKURAN PERUSAHAAN, FREE CASH FLOW(FCF) DAN KEBIJAKAN HUTANG TERHADAP KINERJA KEUANGAN PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA

The purpose of this study was to analyze the Free Cash Flow (FCF) Firm Size and the Debt to Equity Ratio on Financial Performance of Manufacturing Companies on the Indonesia Stock Exchange. This research is causal. The data taken as this research are Manufacturing Companies listed on the Indonesia Stock Exchange in 2017-2018. The population in the study was 146 companies, with a sample of 30 companies using the purposive sampling method, so that the number of observations was 60 units of observation. The data analysis method in this research is multiple linear regression. R Square Testing Results of 0.162 means that the independent variable is X1Firm Size x2 Free Cash Flow (FCF), x3 Debt to Equty Ratio simultaneously affects Financial Performance by 16.2% and the remaining 83.8% is influenced by other factors. Research Results Partially understood that the Firm Size variable has no negative effect and is not significant on Financial Performance. According to the data in table 5. Results of the statistical equation test that the value of Sig. Firm Size variable x1 0.872> 0.05 does not affect and is not significant to the dependent variable Y Financial Performance then the hypothesis is rejected. The results of the study are partially understood that the Free Cash Flow (FCF) variable has a positive and significant effect on financial performance. According to the data in table 5. Results of the statistical equation test that the value of Sig. variable Free Cash Flow (FCF) x2 0.043 <0.05 significant effect on the dependent variable Y Financial Performance. Then the variable Free Cash Flow (FCF) hypothesis has a positive effect on the Financial Performance of Manufacturing Companies in the Indonesia Stock Exchange. The research results are partially known that the Debt to Equity Ratio variable has a positive and significant effect on Financial Performance. Sig value. Debt to Equity Ratio Variable x3 0.018 <0.05 has a significant effect on the dependent variable Y Financial Performance of manufacturing companies on the Indonesia Stock Exchange. Then the hypothesis of Debt to Equity Ratio Variables has a positive effect on the Financial Performance of Manufacturing Companies on the Indonesia Stock Exchange. It is simultaneously significant. Where the probability value (Sig.) 0.018 <0.05, the influence of the free variable consists of the variable Company Size x1, Free Cash Flow (FCF) variable x2, Debt to Equity Ratio Variable x3 Against the Bound Variable Financial Performance variable Y in Manufacturing Companies listed on Indonesia stock exchange.

Determinants of the choice of share buyback methods: A study in India

This study examines signaling, excess cash flow, substitution, leverage, agency cost, stock and liquidity hypotheses by considering firm-specific parameters to find out their impact on selection between tender offer and open market method while doing buyback. This study is based on the basic premise that the rules and regulations those govern these two methods are completely different and have different objectives. This study takes 430 non-financial buybacks from 1998–1999 to 2017–2018 for analysis and these buybacks segregated in terms of tender offer (176) and open market methods (254). In this study, both univariate and multivariate tests have been employed. T-test and Wilcoxon rank sum test are used for univariate analysis, and logistic regression is used for multivariate analysis. The empirical findings corroborate the evidence that free cash flow hypothesis, leverage hypothesis, agency cost hypothesis and liquidity hypothesis are the prime motivators for choosing of tender offer than open market share repurchase. This study finds that dividend paid and choosing of tender offer are substitutes. The results also support the notion that for correcting short-term undervaluation firms choose tender offer rather than open market methods. This study is the first comprehensive analysis in the Indian context to find out the motivations behind the selection of share repurchase methods.

The Effect of Dividend Announcements on Stock Returns for Companies Listed on the Main Board of the Kuala Lumpur Stock Exchange

Stock market reactions to the announcements of final dividend increases, decreases and no changes are empirically analyzed in an emerging market environment. A standard event study methodology is adopted to examine the price reactions of 120 listed companies surrounding sixty days of the announcement dates. Although prior studies in developed countries postulate that dividend decreases are associated with negative abnormal returns, such a reaction was not found in the Malaysian capital market. The evidence nevertheless shows that dividend increases lead to positive abnormal returns, supporting the Information Content Hypothesis, Jensen :s Free Cash Flow Hypothesis and Agency Cost Theory. As for the no change dividend announcements, no clear pattern of cumulative average abnormal returns could be observed.

Sectoral Analysis of Factors Influencing Dividend Policy: Case of an Emerging Financial Market

This study aims to determine whether a firm’s dividends are influenced by the sector to which it belongs. This paper also examines the explanatory factors for dividends across individual sectors in India. This longitudinal study uses balanced data consisting of companies listed on the National Stock Exchange (NSE) of India for 12 years—from 2006 to 2017. Pooled ordinary least squares (POLSs) and fixed effects panel models are used in our estimation. We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy. Furthermore, business risk and debt reveal a significantly negative relation with dividends. The findings on profitability support the free cash flow hypothesis for India. However, we also found that Indian companies prefer to follow a stable dividend policy. As a result of this, even firms with higher growth opportunities and lower cash flows continue to pay dividends. We also find evidence that dividend policies vary significantly across industrial sectors in India. The results of this study can be used by financial managers and policymakers in order to make appropriate dividend decisions. They can also help investors make portfolio selection decisions based on sectoral dividend paying behavior.

Determinants of Dividend Payout Decisions: A Dynamic Panel Data Analysis of Turkish Stock Market

This study analyzes the firm-specific factors affecting the dividend payout decisions of the companies whose shares are traded on the Borsa Istanbul stock exchange. To this end, the dynamic panel regression is applied to 853 observations of yearly average of 106 companies listed on the Borsa Istanbul between 2009 and 2015. According to results from the Arellano–Bover/Blunder-Bond two-step system generalized method of moments, a statistically significant positive effect on dividend payout was found in the relationship between the dividend payout of the previous year, the company’s return on equity and the market value/book value ratio, liquidity and the company’s size. The demonstration of a positive relationship between dividend payout and return on equity supports the free cash flow hypothesis and the positive relationship with the previous year’s dividend payout ratio supports the dividend smoothing hypothesis for Turkey.

Corporate Governance and Firm Performance: A Study of High Agency Costs of Free Cash Flow Firms

Excessive free cash flows can lead to high agency problems as retaining free cash flow reduces the ability of capital market to monitor managers. Managers are also likely to waste the free cash flow on value-decreasing investments. Based on the free cash flow hypothesis, this study examines the relationship between corporate governance and firm performance of a sample of high agency costs of free cash flow firms, which is defined as firms that have high free cash flow and low investment opportunities. The sample firms are extracted from firms listed on the S&P/TSX composite index between 2009 and 2012. Using corporate governance scores provided by The Globe and Mail, this study finds that better corporate governance is associated with better firm performance, measured by return on equity. The results highlight the importance of corporate governance in protecting shareholders’ interests.

RELATIONSHIP BETWEEN BOARD CHARACTERISTICS AND FIRM FINANCIAL DIVERSIFICATION (GEOGRAPHIC SALES) AMONG LISTED FIRMS ON NAIROBI SECURITIES EXCHANGE, KENYA: STATIC PANEL APPROACH

Purpose: The purpose of the study was to determine the relationship between board characteristics and firm financial diversification (geographic sales) among listed firms on Nairobi securities exchange, Kenya: static panel approach.Methodology: Fisher and Levin-Lin-Chu tests were used to test the presence of unit root in the series under study. Hadri residual-based Lagrange multiplier test was used to determine the feasible model.Results: Results revealed existence of positive and significant relationship between interlock directorship and geographic diversification as positive and significant directors' remuneration had a negative and significant effect on firm's geographic sales, while operational risk negatively varied with geographic sales Agency Theory, free cash flow hypothesis Resource Based view theory provided theoretical framework. Directors' remuneration negatively impacted geographic sales but did not explain diversification in relation to national sales. This study affirmed the managerial heuristics as determinant of firm financial diversification providing support to the convectional financial dimensions of firm performance particularly ROE, ROI and EPS.Unique contribution to theory, practice and policy: The Government of Kenya and Capital Market regulator should enact and implement legislations that guides on interlock directorship, directors remuneration diversity and tolerable operational risks as determinants of diversification