A Research on the Informational Content of Free Cash Flow in the Korean Market : A Test on the Agency Cost of Free Cash Flow
Lee, Jang-Woo
Choi, Do-Sung
We test Jensen's (1986) free cash flow hypothesis with Korean market data. Market response at the free cash flow information is our concern. We selected non-financial companies with financial statements during 1980-204. Fixed effect panel regression is used for the analysis. The dependent variable is Tobin's q, and some variables known to have effects on firm value are employed as control variables. Our test hypotheses are (1) Information of having much free cash flow is related to detrimental effect on firm value, (2) capital expenditures lower the level of free cash flow, and are resultantly good news, and (3) dividend payout is associated with lowering free cash flow, and thus contributes to decreasing agency cost of free cash flow'. We document that these three hypotheses are significantly accepted for all periods and high-q firms. The first hypothesis, however, is not accepted for low-q firms. The ancillary free cash flow hypotheses concerning firm size, capital structure, R&D, and growth opportunities are significantly accepted on the whole. Our conclusion is that Jensen's (1986) free cash flow hypothesis is significantly supported in Korean market. Especially capital expenditures and dividend payout are found to have positive informational content in Korean market.
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