Analyzing Value Information of Free Cash Flow from Agency Costs Perspectives
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초록
We try to test a value information effect of free cash flow by using related variables alone or in composition. Our study will be a contribution in that it adds to the understanding of the market response to dividend payout and capital expenditures - especially when these financial activities are related with free cash flow. Also, our study chooses an analytic approach which is differentiated from extant literatures mainly depending on event studies. Our test result shows that more free cash flow are linked to lower firm value spread. This evidence suggests that cash flows at managers' discretion lower value. We then examine how decisions that reduce surplus cash flow, such as investment and payouts, affect firm value. We find that firm value is positively associated with investment and payouts. Overall, our evidence is consistent with the view that stock market investors incorporate the probability and severity of agency problem into their valuation process. Corporate activities that diminish free cash flow - for example capital expenditures, dividend payout, use of debt - are linked to higher market value. More growth options are confirmed to be associated with more firm value spread. The interaction terms also exhibit consistency. Asian financial crisis brings about test results somewhat different from pre-crisis periods. Exclusion of extreme values, and even firms with negative free cash flow, does not dishevel the fore-running results of inverse relatedness between free cash flow and firm value but rather reinforces the statistical significance, certifying the robustness of our test.
Abstract
We try to test a value information effect of free cash flow by using related variables alone or in composition. Our study will be a contribution in that it adds to the understanding of the market response to dividend payout and capital expenditures - especially when these financial activities are related with free cash flow. Also, our study chooses an analytic approach which is differentiated from extant literatures mainly depending on event studies. Our test result shows that more free cash flow are linked to lower firm value spread. This evidence suggests that cash flows at managers' discretion lower value. We then examine how decisions that reduce surplus cash flow, such as investment and payouts, affect firm value. We find that firm value is positively associated with investment and payouts. Overall, our evidence is consistent with the view that stock market investors incorporate the probability and severity of agency problem into their valuation process. Corporate activities that diminish free cash flow - for example capital expenditures, dividend payout, use of debt - are linked to higher market value. More growth options are confirmed to be associated with more firm value spread. The interaction terms also exhibit consistency. Asian financial crisis brings about test results somewhat different from pre-crisis periods. Exclusion of extreme values, and even firms with negative free cash flow, does not dishevel the fore-running results of inverse relatedness between free cash flow and firm value but rather reinforces the statistical significance, certifying the robustness of our test.
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