A study on relationship among free cash flow, firm value and investors’ cautiousness: Evidence from Tehran Stock Exchange

Abstract

Financial statements as well as financial standards are always considered as primary sources for getting rich information of firms. The standards are normally divided in two categories of economic and accounting and each of these standards shows one of the specifications of the company and has its own advantageous and disadvantageous. There are different standards, which are used for firm assessment. Therefore, a company with more gained prominences has more change to succeed in attracting credits and financing from the capital market. Under such circumstances, such a company can attract more finance and it can be sold sooner on the stock exchange. This paper tries to investigate on the free cash flow as an effective factor in specifying the real value of the business enterprises on 56 selected firms from Tehran Stock Exchange. The results of this study have disclosed that, there was a direct and meaningful relationship between free cash flow of the business enterprises and their real values. Second, the real values of the business enterprises are more than their predicted values. Finally, the predicted value of the business enterprises on the basis of the free cash flow is more than their market value.

Free cash flow effect towards firm value

“…This can be a positive signal for investor regarding the prospect of the company in the future. This result accordingly with previous research by Hermuningsih (2016); Al-Zararee & Al-Azzawi (2016); Ghodrati and Hashemi (2014); and Suartawan & Yasa (2016), found free cash flow effect was positively regarded the firm value. This research also supports agency theory that explains how management makes a decision to improve the firm value.…”

“…Free cash flow shows the financial flexibility of the company to welfare shareholders. The research conducted by Hermuningsih (2016); Al-Zararee & Al-Azzawi (2016); Ghodrati & Hashemi (2014); and Suartawan & Yasa (2016), proved that higher free cash flow reflects a good performance that can be a positive signal for investor regarding company's prospect in future. Based on the description, the hypothesis is proposed as follows: H1: Free cash flow has a positive effect on firm value.…”

“…Previous research regarding firm value has been carried out a lot. Hermuningsih (2016); Al-Zararee & Al-Azzawi (2016); Ghodrati & Hashemi (2014), and Suartawan & Yasa (2016), found that free cash flow has a positive effect on firm value, but Naini (2014) and Embara et al, (2012), found that free cash flow didn't have an effect on firm value. This inconsistency becomes base for adding dividend payout and investment opportunity set as a mediator in the relation between free cash flow and firm value.…”

Faktor-Faktor Prediktor Investment Opportunity Set Dan Firm Value Pada Perusahaan Propertydan Real Estate Yang Terdaftar Di Bei

“…(2008), free cash flow merupakan peluang atas kelebihan kas yang didiskontokan pada waktu tidak terhingga yang diperlukan untuk mendanai investasi dan proyek yang memiliki nilai net present value positif. Ghodrati & Hashemi (2014) menyatakan bahwa free cash flow menjadi pengukur kinerja perusahaan yang dicerminkan melalui kas yang tersedia untuk perusahaan setelah membayar beban yang dibutuhkan dalam memelihara dan mengembangkan asetnya. menurut Manzaneque et.…”

“…Sesuai penelitian Ojo (2012) bahwa peningkatan risiko dari penggunaan hutang pada konsep trade off theory dapat memberikan variabilitas peningkatan laba per saham pada proyeksi rencana investasi yang menguntungkan di masa depan. Selanjutnya, serupa dengan penelitian Ghodrati & Hashemi (2014) bahwa free cash flow menghasilkan opportunistic behavior yang dapat memberikan pengaruh negatif terhadap firm value. Makna dari hasil temuan tersebut adalah arus kas bebas yang berlebih terlalu banyak dapat menyebabkan penyalahgunaan arus kas untuk kepentingan pribadi atau kepentingan pengembangan yang tidak terlalu signifikan meningkatkan firm value.…”