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.