Level Of Free Cash Flow Research Articles

Managerial Incentives and the Valuation of International Joint Venture Formation

Strategic management decisions and actions involving international joint venture formations are significant to many firms and have major economic consequences. Previous empirical evidence on the effects of joint venture formation announcements on shareholder wealth reveals that firm value is more often positively impacted. However, many previous analyses of shareholder wealth from joint venture formations do not fully explore cross-sectional differences in managerial incentives to pursue these international investments. The primary purpose of this study is to exploit these cross-sectional differences using agency theory to explain managerial behavior and subsequent shareholder effects. This study capitalizes on agency theory’s notion that managers are not necessarily motivated solely by the maximization of firm value, but instead are interested in maximizing their own utility. The study’s findings are consistent with agency theoretic hypotheses based on a broad cross-section of international joint ventures. Results demonstrate that shareholder returns to international joint venture formation exhibit considerable variability and, importantly, are at least partially explained by cross-sectional differences in agency incentives. Specifically, returns to shareholders are positively related to the level of managerial ownership and inversely related to the level of free cash flow. Moreover, a positive relation is found between shareholder returns and the joint interaction between leverage and free cash flow. These findings indicate that the effect of international joint venture formation on shareholder value is not uniform and, more importantly is at least partly influenced by managers’ agency incentives.

Impact of Dividend Payment on Firms’ Leverage: Moderating Role of Firm Size

This article investigates the impact of firms’ dividend payment decision on its capital structure. It also examines whether firm size moderates the relationship between dividend decision and capital structure. It relies on a large dataset of 4,116 listed firms over the period 2002–2019 in the Indian scenario comprising 37.21% firm-year observations as dividend payers and 62.79% firm-year observations as dividend non-payers. Fixed effect regression is used for analysis based on the results of the Hausman test for model specification. The study observes negative impact of dividend payment on firms’ leverage ratios. Ability of dividend payment to mitigate the free cash flow agency conflict together with the availability of substantial volume of retained earnings to meet the financing requirements internally are found to be possible explanations for lesser demand of debts in case of dividend paying firms. The study also finds heterogeneous impact of dividend payment on leverage ratios for small and large firms, thus confirming the moderating role of firm size. The higher level of free cash flow for dividend payers compared to non-payers in case of small firms is found to be the only possible explanation for such results. Financial managers may refer to the findings of the study as a guide while deciding their financing choices.

Social insurance and earnings management: Too rich to be good.

We examine the relationship between social insurance contributions and earnings management for publicly listed firms in China. Our empirical results show that the social insurance contributions burden significantly reduces the degree of earnings management by reducing the level of free cash flow. Additionally, the negative relation between social insurance contributions burden and earnings management is more pronounced when the internal and external social insurance pressures are high and when the firms are large non-state-owned enterprises. We also discuss the heterogeneity among firms for different financing constraints, external financing environment, regional marketization, and internal and external corporate governance. Finally, we further find that under the dual collecting system, although the social security administration is a better collecting agency, the local tax bureau acting with full responsibility is more effective than the collecting system.

Retracted] Relationship between Capital Allocation Efficiency and Diversification Strategy from the Perspective of Internal Control

Based on the quality of internal control, this study discusses the impact of internal control quality on resource allocation in the internal capital market and how capital allocation efficiency affects strategic decision‐making. If the quality of internal control can be correctly evaluated and included into the management's strategic decisions, the enterprise can improve the efficiency of capital allocation and formulate an appropriate development strategy. Using panel data from the Shanghai and Shenzhen stock markets from 2013 to 2017, we investigate the relationship among overall internal control information quality, capital allocation efficiency, and enterprise strategic decision‐making. The results show that when the level of free cash flow is high, the incentive mechanism of corporate governance increases the possibility of diversification; the lower the quality of internal control information is, the more likely it is for enterprises to pursue diversification; improving the quality of internal control helps management to allocate internal resources reasonably. When the efficiency of capital allocation is high, it can effectively prevent diversification. This study contributes by revealing the mechanism of the impact of internal control quality on strategic decision‐making and expands the relationship between internal control and corporate strategic management.

Economic policy uncertainty and overinvestment: evidence from Korea

The authors show that there is a negative relationship between economic policy uncertainty (EPU) and firm overinvestment using Korean data from 2007 to 2016. Since Jensen (1986) shows that a firm's free cash flow is an important factor of overinvestment, the authors examine how free cash flow influences the sensitivity of overinvestment to EPU. The authors find that a high level of free cash flow attenuates the negative effect of EPU on overinvestment. The authors find that there is no significant difference in the effect of EPU on overinvestment between Chaebol (Korean family-run conglomerates) and non-Chaebol firms, which is consistent with the literature that the features of Chaebol are weakening.

The Association between Board Gender Diversity and Corporate Investment Efficiency

We investigate the relationship between board with female outside directors (FODs) and firms’ investment efficiencies using the firms listed in KOSPI from 2015 to 2019. We find that the association between firms with FODs and their investment efficiencies is generally insignificant although we find a weak negative association with under-investment. Then, we conduct the additional analyses to see if the association between them would be different in firms with high agency costs arising from excess free cash flow. Interestingly, we find that firms with FODs are negatively associated with over-investment as well as under-investment but the association is only pronounced in firms with higher level of free cash flow. The results of this study continue to maintain when we employ propensity score matching approach to address self-selection bias. Overall, our evidence supports the prior studies suggesting the positive aspect of gender-diverse boards in corporate decision-making process. That is, gender diversity may enhance board‘s governance roles, providing implication that female outside directors in boards can add a value to a firm needing a strong governance mechanism. This could be of interest of regulators and policy makers while considering the adoption of female quota system in the board of directors in listed firms.

Defining the Relationship Between Firm’s Performance and Delisting: Empirical Evidence of Going Private in Europe

One of the reasons why a firm chooses to go private is the significant amount of cash flows which can exacerbate agency costs: this can indicate poor growth opportunities and make external resources less required. In line with both knowledge economy and financial literature, the paper aims to indagate the relationship between agency costs, firm’s performance, and delisting. Despite there is evidence in finance that highlights the role of exchange regulators in the going private processes, just few studies focus on the voluntary delisting and its antecedents. Starting from the knowledge economy setting, this paper aims to define how firm’s financial performance moderates the relationship between agency costs and delisting choices. Based on a sample of non-financial firms delisted from the most important European stock markets between 1997 and 2017, we applied an OLS regression to analyze the main variables that influence the going private processes. We find that a high level of stock market performance, associated with high level of free cash flows, promotes going private as a means of anticipating and preventing future value decreases. Finally, the paper provides practical implications for the development of new approach of delisting choice.

Taxes, Mispricing, or the Agency Cost of Managerial Discretion? Evidence from Corporation to REIT Conversions

We study the effect of change in the organizational structure from a corporation to a real estate investment trust (REIT) on the firm value. Changing the organizational structure from a corporation to a REIT could result in an increase in the firm value, and some companies may be motivated to change their organizational structure because of this. We examine three possible sources of gains in the firm value from such a change in the organizational structure. They are the potential tax savings, reduction in agency costs of managerial discretion, and increase in the price multiples after the conversion. We examine the changes in the firm value of firms that announce conversion to a REIT during 1990–2016. We find that the announcement period returns are positive and strongly significant. Consistent with the tax hypothesis, the announcement period returns are positively related to the effective tax rate of the sample firms. Consistent with the managerial discretion hypothesis, the announcement period returns are positively related to the level of free cash flow of low growth firms. Consistent with the mis-valuation hypothesis, the announcement period returns are higher when REIT valuations are higher relative to the sample firms.

Does firm payout policy affect shareholders’ dissatisfaction with directors?

In this study we investigate the information content of firm payout policy to shareholders. We focus on the association between a firm’s payout policy and shareholders’ satisfaction with board directors, as expressed by the percentage of negative or withheld votes for directors during annual elections (shareholders’ dissent voting). We fill a gap in the literature by using shareholders’ voting results in the election of board members at annual meeting as a setting to examine shareholder perception of firms’ payout policies. We find that higher share repurchase and/or higher dividend payout are associated with lower shareholders’ dissenting votes. We also find that such relationship is conditional on the level of free cash flow, firm future performance, the degree of management entrenchment, and the type of institutional investors. Our study contributes to the payout literature by providing empirical evidence that shows the outcome of shareholders’ votes in director elections may be influenced by the board of directors’ payout decisions.

Voluntary disclosure and free cash flow in family French firms

This research investigates the governance role of voluntary disclosures especially in reducing agency problems measured by the level of free cash flow (FCF). In addition, it also shows the moderating effect of family ownership and governance mechanisms on this relation. Our research was conducted on a sample of 138 listed French firms between 2009 and 2013. To avoid the endogeneity problem caused by the voluntary disclosure variable we used the 2SLS regression method. The results show, on the one hand, that transparency provided by voluntary disclosures reduces the level of FCF and by the way agency problems. But family owners tend to accumulate FCF. On the other hand, the governance role of voluntary disclosure turns to be ineffective in family firms. This suggests a high risk of expropriation of minority shareholders by family ones. In addition, we demonstrate that governance mechanisms, especially board independence, gender diversity and audit committee independence, contribute to the strengthening of the governance role of voluntary disclosure.

INVESTIGASI EMPIRIS INTERAKSI FREE CASH FLOW, EARNING MANAGEMENT DAN INEFISIENSI INVESTASI

The level of Free cash flow has a pivotal role for investors to understand the inefficiency of a company's investment. This paper discusses empirical research that investigates the main effects of free cash flow and the effects of their interactions with earning management on investment inefficiency. This study uses a sample of 56 infrastructure, utility and transportation companies registered in Indonesian's Capital Market for the fiscal year ended on December 31, 2014 to 2018. This study uses a multiple regression method with the pooled ordinary least square (OLS) approach for 256 observational data. This study find that the main effect of free cash flow is significantly positive on investment inefficiency, but the earning management does not affect inefficiency investment. Furthermore this study find that the interaction effect of free cash flow is significantly negative on investment inefficiency if the amount of earning management is small.

Controlling Family and Corporate Governance

Building on the theory of Burkart et al. (2003) that family ownership and control of firms mitigate the twin conflicts between owners and managers and between majority and minority owners, we suggest that the allocation of firm ownership rights and informal governance within controlling families helps mitigate conflicts among family members, a third type of agency problem unique to family firms. We analyze the internal governance of firms’ controlling families and its effects on corporate governance outcomes with a large sample of Chinese private-sector firms. We report that when firm ownership and management are shared by more family members, the volumes of suspicious related-party transactions are lower. The curtailing effects are stronger when founders collaborate with more distant relatives, when families are influenced by collectivist culture, and when firms have higher levels of free cash flow and are subject to weaker market disciplines. Overall, intra-family governance manifested by the partition of family ownership rights strengthens corporate governance.

Debt-financed repurchases and credit ratings with the respect of free cash flow and repurchase purpose

We find that the fraction of debt used to finance share repurchases is negatively associated with credit ratings. In particular, this association is more pronounced for firms with a high level of free cash flow. We further divide the sample by the repurchase purpose. We find that the associations between debt-financed repurchases, free cash flow, and credit ratings hold when the repurchase is made for the purpose of transferring shares to employees or for the purpose of equity conversion of convertible securities, but not when it is made for maintaining the company’s credit.

PENGARUH ALIRAN KAS BEBAS TERHADAP KEPUTUSAN PENDANAAN MELALUI SET KESEMPATAN INVESTASI DAN NILAI PEMEGANG SAHAM SEBAGAI MODERASI

This study aims to determine the impact of various corporate contextual factors through investment opportunities, earnings management, on the influence of the level of free cash flow on funding decisions. The sample in this study were 18 retail trade companies that were listed on the Indonesia Stock Exchange for 5 years (2013-2017). The analysis technique used is MODPROBE macro v 2.0 using SPSS 22 program. The results of statistical tests in this study indicate that together (Test-F) free cash flow on funding decisions, investment opportunity sets as moderating variables have a significant effect in strengthening flow relationships free cash on funding decisions and shareholder value as moderating variables have a significant effect in strengthening the relationship of free cash flow to funding decisions. Then in the T-Test all variables have a significant effect on funding decisions.
 Keywords: Free Cash Flow, Investment Opportunity Set, Shareholder Value, Funding Decision

The mediating effect of dividend payout on the relationship between internal governance and free cash flow

PurposeThis paper aims to examine the mediating effect of dividend payout on the relationship between internal governance mechanisms (board of directors and ownership structure) and the free cash flow level.Design/methodology/approachLinear regression models are used to investigate such relationships applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council countries’ stock markets between 2009 and 2016. To test the significance of mediating effect, the author uses the Sobel test.FindingsThe author finds a partial mediation effect of dividend on the relationship between both board independence and managerial ownership and the level of free cash flow. The results confirm the major role of outside directors in corporate governance. This governance mechanism contributes to the protection of shareholders’ interests through a generous dividend policy. However, the author finds that large managerial shareholdings increase the level of free cash flow through lower dividend payouts. This result suggests that powerful managers follow their preference of retaining excess cash to their own interests.Practical implicationsThis paper offers insights to policy-makers of emerging economies interested in the development of the corporate governance. This study provides guidance for firms in the construction and implementation of their own corporate governance policies.Originality/valueThe main contribution of the present paper is to examine the dividend payout as a potential mediating variable between internal governance mechanisms and free cash flow. Moreover, it highlights the issue of efficient management of substantial funds in Sharia-compliant and non-Sharia-compliant firms.

Payout and Firm's Catering

This paper is built upon the predictions of the catering theory of dividends and examines whether investor sentiments exert significant influence on corporate dividend policy.Accordingly, we propose a dividend model that incorporates a variable at the firm-level proxy for the catering effect.Estimation of the model using the GMM shows that firms in Eurozone countries cater to their investors’ sentiments, and the model provides evidence supporting the catering model.Additionally, we show an interaction effect between catering and firm characteristics, particularly liquid assets, investment opportunities, and levels of free cash flow.

Agency hazard, managerial incentives, and the wealth effects of joint venture investments

Grounded in agency theory, this study explores whether the separation of ownership (by shareholders) and control (by managers) in firms is an essential determinant of the valuation effect of joint ventures (JVs). This is achieved by examining the efficacy of incentive alignment mechanisms and their contingency effects. Based on a sample of 963 U.S. firms' JV investments, the results show that poor JV performance is linked to lower levels of executive ownership and reduced equity compensation. The possibility of managers acting for their own self-interest in corporate JV investments is further supported by the stronger positive performance effect of incentive alignment mechanisms documented when firms have a higher level of free cash flow or undertake JVs in unrelated business domains. Both performance measures of short-run announcement effects and long-run stock returns yield similar results. Our results underscore the importance of governing executives' self-interested actions in their JV engagements.

Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity

Abstract Higher CEO ownership and cash payouts have the potential to mitigate agency conflicts associated with overinvestment of free cash flows. But empirical evidence on the effect of CEO ownership on payout policy is mixed. Previous studies, however, use CEO ownership percentage as a proxy for delta (the sensitivity of CEO wealth to stock price). Ownership percentage is known to decrease in firm size, while the likelihood of cash payouts increases with firm size. This study uses scaled wealth-performance sensitivity (Edmans et al., 2009), a proxy for CEO delta uncorrelated with firm size, to examine the effect of CEO ownership on payout policy for a sample of 6656 firm-year observations from 1995 to 2008. Our results suggest that CEO ownership has significant influence on payout policy, but that the nature of the relation depends on the prior payout history of the firm, and the level of free cash flow in the firm.

Managers’ Escalation Behavior in Equity Investment Decisions and the Role of Corporate Governance

The aim of this study is to investigate the relationship between free cash flows and escalation behavior in the long-term stock buying decisions for the firms listed in Taiwan. The main findings include: (1) Managers tend to exhibit the escalation behavior in the long-term equity investment. (2) There is a positive association between the level of free cash flows and the magnitude of managers’ behavioral escalation. (3) The corporate governance mechanisms play a contributory role in mitigating the escalation behavior. The evidence is robust across subsamples for electronic versus non-electronic industries, growth versus value firms, and loss versus gain firms.

Do voluntary cash flow disclosures and forecasts matter to value of the firms?

Purpose – Two stylized facts emerge from cash flow literature. One explores the link between free cash flow (FCF) to firm value (Jensen, 1986) and establishes that FCF increases firm value. The other posits FCF may be value decreasing as firms tend to over invest when there is high level of FCF (Richardson, 2006). Two camps have opposing views yet together they establish that FCF is value relevant. If FCF or cash flow, in general, is value relevant then managers will be motivated to present forecasts to investors. The paper aims to discuss these issues. Design/methodology/approach – The authors hand collect data from each firm’s press releases and earnings announcements and perform an event study around this date to see how firm forecast and disclosure policies affect firm value. Findings – The analysis demonstrates that disclosures and forecasts do have significantly positive relation with tech firms suggesting that firms in the technology industries are more forthcoming with cash flow disclosures and forecasts in their earnings announcements. The authors further show that these disclosures and forecasts negatively affect the firm value of tech firms. Originality/value – This paper contributes to the literature that there is empirical evidence that cash flow disclosures and forecasts matter to the value of the firm. Further, it posits that unlike understanding the existing views as opposing each other, may be the authors will be better served if they view both of them as right depending on the optimality of forecasts. The future efforts will be directed toward exploring the optimality of cash flow disclosures.