A study on agency costs: The relationship of the free cash flow hypothesis to sales growth and firm performance

• Main Authors: Cancino, Isaac Christopher J., Merin, John David G., Villareal, Justine Jeffrey J., Yapendon, Joseph T.
• Format: text
• Language: English
• Published: Animo Repository 2013
• Subjects: Cash flow > Philippines; Stock ownership; Accounting
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/11567
• Institution: De La Salle University

The paper tests the agency argument if free cash flow contributes to higher sales growth. It also tests if firm performance is negatively affected by free cash flow. And it finally test if governance controls help mitigate such effects to the performance in relation to its sales growth. The related literature illustrates the brief history of agency theory and that free cash flow is one of the quantifiable amounts available for agency cost. Deriving samples from manufacturing firms in Europe, the data was analyzed using a panel data regression under the random effects model. Contrary to agency theory, free cash flow does not increase sales growth. Performance however is consistent with the theory and has a negative correlation with free cash flow. Results for governance controls yielded only one significant result ou of possible three for performance and none for sales growth. Owner-controlled firms provide a negative effect on performance for firms with free cash flow.