Impact of free Cash flows on firm performance:
A case of cement sector of Pakistan.
Waseem Khan
BS Accounting and Finance
A thesis submitted to the faculty of the Institute of Management Sciences, Peshawar
in partial fulfillment of the requirements for the degree of BS Accounting and
Finance
INSTITUTE OF MANAGEMENT SCIENCES PESHAWAR
Session 2014-2018
Certificate of Approval
I certify that I have read “Impact of Free Cash Flow on Firm Performance: A case of
cement sector of Pakistan” by Waseem khan, and that in my opinion this work meets
the criteria for approving a thesis submitted in partial fulfillment of the requirements for
the degree BS Accounting and Finance (2014-2018) at Institute of Management Sciences,
Peshawar.
Supervisor
Name: Afraz Abdurehman
Designation: Lecturer
Signature: ________________
Coordinator Research & development Department
Name: ___________________
Signature: ________________
ii
DECLARATION
I hereby, declare that research submitted to R&DD by me is my original work. I am
aware of the fact that in case my work is found plagiarized or not genuine, R&DD has
full authority to cancel my research work and I am liable to penal action.
Student’s name: Waseem Khan
Date: May 22, 2018
iii
DEDICATION
I would like to dedicate my research work to loving and sweet family members
specially, my
Mom and Brothers
Whose affection, love, encouragement and prays of day and night make me able to
get such success and honor,
Along with all hardworking and respected teachers.
Waseem Khan
BS Accounting and Finance
iv
AKNOWLEGMENT
First, I would like to thank almighty Allah for enabling me to complete this research
work.
I wish to pay my heartfelt thanks and respect to my research supervisor Mr. Afraz
Abdur Rehman for his continuous guidance and support throughout my research.
Last but not the least, a debt of gratitude is also owed to my friends who helped me
out to complete this research.
v
Abstract
This study investigates the impact of free cash flows on firm performance of cement
sector of Pakistan. Data is collected for a period of 6 years from 2011 to 2016. Variables
of the study consist of FCF (free cash flow), Size of the firm, Financial leverage, ROA
(return on assets) and ROE (return on equity). Using multiple linear regression model
results of the study show a positive relation between free cash flow and firm performance
of cement sector of Pakistan. The results also showed that firm performance and size
have positive relation while there is a negative relationship between financial leverage
and firm performance.
vi
Contents
Chapter 1. Introduction ................................................................................................................... 1
1.1.
Background of the study: ................................................................................................. 1
1.2.
Purpose of the study: ....................................................................................................... 3
1.3.
Research Question: .......................................................................................................... 3
1.4.
Objective of the study: ..................................................................................................... 3
1.5.
Significance of the study: ................................................................................................. 3
1.6.
Scheme of the study: ....................................................................................................... 3
Chapter 2. Literature Review: .......................................................................................................... 5
Chapter 3. Methodology: ............................................................................................................... 10
3.1. Population: .......................................................................................................................... 10
3.2. Sample: ............................................................................................................................... 10
3.3. Sample Period: .................................................................................................................... 10
3.4. Data and Data sources: ....................................................................................................... 10
3.5. Data analysis: ...................................................................................................................... 11
3.6. Theoretical Framework: ...................................................................................................... 11
3.7. Variable Description:........................................................................................................... 12
3.7.1. Independent Variable: ................................................................................................. 12
3.7.2. Dependent Variable: .................................................................................................... 12
3.8. Control variables: ............................................................................................................ 13
3.11. Model: ............................................................................................................................... 13
3.12. Hypothesis: ....................................................................................................................... 14
Chapter 4. Analysis:........................................................................................................................ 15
4.1. Descriptive Statistics Table: ................................................................................................ 16
4.1.1. Descriptive analysis: ..................................................................................................... 16
4.2. Correlation: ......................................................................................................................... 17
4.2.1. Interpretation of the table 2. ....................................................................................... 18
4.3. Regression: .......................................................................................................................... 19
4.3.1. Regression Analysis: ..................................................................................................... 20
Chapter 5. Conclusion .................................................................................................................... 23
References ..................................................................................................................................... 25
vii
Chapter 1. Introduction
1.1. Background of the study:
Free cash flow (FrCF) is the amount of funds which is left after the fulfillment of all
those investments which have a positive net cash flow, the concept of (FrCF) was
initiated by Jensen in 1986. Due to the separation of ownership and management, the
managers of firm work for their own personal interests instead of shareholders of a, due
to which a firm bears the agency costs. Agency theory is used as base for the free cash
flow hypothesis. The hypothesis of free cash flow states that managers would try to have
greater amount of free cash flow so that they can easily manipulate with free cash flow
and use it for their own interest instead of the shareholders. Management will invest the
funds in projects, having negative net present values (Jensen, 1986; Jensen & Meckling,
1976), underproductive investment projects or for their own benefits. According to the
hypothesis of (FrCF) a negative relation exists between free cash flow and firm
performance.
According to pecking order theory the external source of funds will be a costly
source of fund due to asymmetric information, so the corporations will try to use an
internal source of funds before searching for an external source of funds, (Myers &
Majluf, 1984). Therefore, the management may use the excess of funds for their
investments projects and can get rid of the problem of underinvestment and the cost of
financing is reduced. Consequently, the free cash flow and corporate performance have
positive relationship in different situations.
Free Cash Flow(FrCF) is the cash that a firm generates after paying all the capital
expenditures. This cash can be used for different purposes such as reduction of debt,
1
expansion purposes or dividends etc. FrCF is the amount of money that a company have
after the necessary maintenance and development of property. Free cash flow is the extra
cash available after fulfilling the necessary requirements of the business, therefore, it is
called free cash flow. Free cash flow is the amount of net income plus any non-cash
expenses like depreciation and amortization minus changes in working capital and capital
expenditure. Free Cash Flow can be find using the following equation; EBIT (1-tax rate)
+ (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).
Depending on the data different equations can be used to calculate free cash flow.
Using all the available resources management works efficiently to maximize
profits, which is the objective of all firms. It is the responsibility of management of every
organization to maximize the return and profits using financial decision and strategies.
Profitability measures are used by managers and owners to check the performance and
efficiency of company. Profitability ratios can be divided into two main types one is
margin and other one is returns (Petersen and Kumar, 2010).
Different papers have shown different relations between FrCF and profitability of
the firm. Research of Hubbard (1998) has shown a positive relation between free cash
flow and profitability of the firm, increasing the level of cash flow increases the profits of
the firm. Firm uses extra cash for profitable investment projects. Firm can use cash for
speculative purposes to wait for such an opportunity that can pay better returns in future.
The free cash flow may have a relation of negative behavior with the profitability of the
firm if it is invested poorly and engages in an investment that may result in loss (Griffith
& Carroll, 2001).
2
1.2. Purpose of the study:
The purpose of the study is to analyze the relationship of free cash flows and
performance of the firm. In Pakistan, for cement sector there is no research work to study
the relationship of free cash flows and firm performance.
1.3. Research Question:
What is the impact of free cash flows on performance of the company of cement
sector of Pakistan?
1.4. Objective of the study:
The objective of the study is to identify the impact of free cash flow on firm
performance in cement sector of Pakistan.
1.5. Significance of the study:
Some of the companies have greater amount of free cash flows and some of the
companies have smaller amount of free cash flows. This study is going to analyze
whether these free cash flows affects the performance of the company positively or
negatively. This study will provide the data in context of Pakistan, especially cement
sector of Pakistan which can be used to for the problems that arises due to the amount of
free cash flows in future.
1.6. Scheme of the study:
Scheme of the study has been organized in the following way.
1. Chapter 1 is about introduction of the study.
2. Chapter 2 is literature review.
3. Chapter 3 is methodology of the study.
3
4. Chapter 4 is analysis of the results of the study.
5. Chapter 5 is conclusion of the study.
4
Chapter 2. Literature Review:
Kadioglu, Kilic, and Yilmaz. (2017) has used a data of 370 companies for period
of seven years (2009-2015) in Bosra Istanbul to study the relation between free cash flow
and performance of the company. The total number of observations that they have used is
2175, 1273 of them were derived from consolidated financial statements and 902 from
nonconsolidated financial statements. The study has run a panel regression to test the
data. They have found negative relation between free cash flow and performance of the
company. Higher the free cash flow lower will be the performance of the company and
lower the free cash flows higher will the performance of the company. The study has also
investigated the relation of debt financing by the firm and dividend payments to
performance of the firm, and have found a positive relation. By increasing debt financing
and payment of dividend the amount of free cash decreases and scrutiny of management
increases by the market investors. This study has confirmed the free cash flow hypothesis
that free cash flow in the control of management and performance has negative relation.
If the management of the company have free cash flows they may use it for lavish
purposes or invests in investment of negative present value. The performance of the
company can be increased by dividend payments and debt financing to reduce the free
cash flows.
Heydari, Mirzaeifar, and Jawadghayedi. (2014) has investigated the relationship
of free cash flows and performance by selecting a sample of 63 firms from Tehran stock
exchange for a period of seven years, from 2006 to 2012. The study has also investigated
the free cash flow hypothesis for Tehran stock exchange. Correlation regression
methodology has been used. The study has one main hypothesis and three sub
5
hypotheses, main hypothesis of the study is, there is relationship between free cash flows
and performance while sub hypotheses are there is relationship between free cash flows
and return on assets ratio, return on equity ratio, tobins’ ratio and stock return
respectively. The study has used free cash flows as dependent variable, performance as
independent variable which further consist of four proxies, return on assets, return on
equity, stock return and tobins’ q. The study has used firm size and financial leverage as
control variables. The study has showed that there is negative relation between free cash
flows and all proxy variables of firm performance. According to this research if we
increasing the free cash flows the conflict of interest between management and
shareholders will increase, because the management of the company will use the free
cash flows for their own interest instead of increasing the shareholders wealth, as a result
the performance of the company will decrease.
Hong, Shutting, and Meng. (2012) has studied the relation of free cash flows and
performance of the company using data of all listed real estate companies of shanghai and
Shenzhen stock exchange in china for a period of 2006 to 2012. Performance is selected
as dependent variable and free cash flows and control variables as explanatory variables.
Model of the study is multivariate linear regression. The study analyzed the Pearson
correlation and found that there is significant negative relation between the performance
and free cash flows. So, it shows that excess of free cash flows is not good for the
performance of the company. The result is in accordance with the theory of agency cost,
that the performance and excess of free cash flow are negative related.
According to the study of An, and Tuan (2018), done on 208 Vietnamese listed
companies there is positive relation between free cash flow and the financial performance
6
of the firm, which is in contrary to the agency theory of Jensen (1986) and inconstant
with the empirical evidence by previous studies on firms in developed markets. The
reason of positive relationship between free cash flow and performance may be because
due to information asymmetry, these funds as the cheapest source of funds as compared
to other source of funds. So, in case of high information asymmetry the agency costs of
free cash flows are out weighted by the benefits of free cash flow as cheap source of
funds. The paper has made positive contribution towards the relation of free cash flows
and performance of the firm, but their study has some limitations like that of only return
on assets as measure of the profitability of the firm, model used in research study and the
companies Vietnam were only tested.
Kamran, Zhao, Ambreen. (2017) have analyzed the effect of free cash flows on
firm performance for a sample of 30 firms from a population of 580 firms of Karachi
Stock Exchange, during a period of 2010 to 2014 (5 years). Using the Regression model
analysis to check the impact of free cash flow and firm performance for the firms listed
on Karachi Stock Exchange, they have found a significant positive relationship between
free cash flow and firm performance. The study shows that free cash flows positively
effects the performance of the company, but excessive free cash flows results in agency
costs which may negatively affect the performance of the company. If there are no free
cash flows or less free cash flows in a firm the stockholder may conclude that they will
not get any benefit or less benefit from the firm, so they may quit from the firm.
Similarly, free cash flow is arrived after deducting all expenses from the profit generated.
So, if the firm is performing better it will have positive amount by deducting cost of sales
from revenue of sales. If a company is performing better it will have a positive value of
7
the free cash flows, which shows that free cash flows and performance of the company
are positively corelated.
Mansourlakoraj, and Sepasi. (2015) has investigated the relationship between free
cash flows and capital structure and value of the firms, using a data of 80 firms of Tehran
Stock Exchange for a period of 2009 to 2013, and has found a significant positive
relationship which is in contrary to the agency cost theory. This may be because of the
cheapest source of finance as compared to other sources of finances, their benefits may
be more than the costs arises due to agency problem
Wang. (2010) has investigated that how free cash flows and agency costs
influence the performance of the firm using empirical data from Taiwan publicly listed
companies. The study has found that agency costs has negative relationship with the
performance of the company which is in accordance with agency theory, but free cash
flows and performance has positive relation which is contrary to free cash flow
hypothesis. This means that high free cash flows will result in more investment
opportunities which may increase the value of the firm.
Javed, Rao, Akram, and Nazir. (2015) has investigated the effect of financial
leverage on performance in Pakistan for textile sector of Pakistan. Ordinary least square
method was used to study the efficiency of using 154 companies of textile sector of
Pakistan for a period of 6 years from 2006 to 2011. They find that financial leverage and
performance are negatively correlated which is in accordance with the results of Pecking
Order Theory. They argued that long term debt and total debt has negative relation with
return on assets and return on equity. The study has also argued that large companies
have the economies of scale which effects the performance of the company positively.
8
According to pecking order theory firms get less amount of debt and earn maximum,
because of the first use of internal source of funds as cheap source of funds.
Singh and Bansal. (2016) has investigated the relationship of financial leverage
and firm performance, using a data of 60 Fast Moving Consumer Goods companies from
National Stock Exchange and Bombay Stock Exchange in India. Data was collected for a
period for a period of 10 years from 2007 to 2016. They have found a negative significant
relation between financial leverage and firm performance.
A study consists of financial data of 137 companies from both financial and nonfinancial sector of Nigeria, has investigated that there is positive relation between firm
size and firm performance, there is also positive significant relation between firm
performance and corporate governance disclosure (Foyeke, Odianonsen, and Aanu.
2015). Therefore, it is good for companies to have Corporate Governance Disclosure to
achieve better performance for the company. Large size of the company provides
economies of sales which in turn increases the performance of the company (Foyeke,
2015).
9
Chapter 3. Methodology:
3.1. Population:
Population of the study consists of all the companies of cement sector of Pakistan
whether listed or not listed on Pakistan stock exchange.
3.2. Sample:
The sample selected for this study consists of 20 companies of cement sector of
Pakistan. The sample consists of only those companies for which data was available for a
period of six years from 2011 to 2016.
3.3. Sample Period:
The period of the work consisted of six years from 2011 to 2016.
3.4. Data and Data sources:
The data used for the study is secondary data and collected from different sources.
The data for the study has been taken from the available annual reports of the companies
and different websites. The following sites have been used for the data. Data was
collected from the financial statement analysis of non-financial sector for period of 2011
to 2016 done by state bank of Pakistan and from the financial statements of companies
available online.
www.sbp.gov.pk
www.opendoors.pk
10
3.5. Data analysis:
Regression analysis was used to examine the relationship between free cash flows
and performance of the company. Stata software was used to run the analysis.
3.6. Theoretical Framework:
Free cash flow
ROA
Independent Variable
Performance of the Firm
Firm Size
ROE
Financial leverage
Dependent
Control Variables
11
3.7. Variable Description:
3.7.1. Independent Variable:
Independent variable for the study is free cash flow and it is calculated as follows:
FCF = (OCF – Tax – Iexp - div) /sales
Where FCF denotes free cash flows; OCF operating cash flows; Tax: corporate income
tax expense, IExp: interest expense Div: dividend and Sales: net sales.
3.7.2. Dependent Variable:
The dependent variable of the study is Firm Performance. The firm performance
is measured by the return on assets, return on equity of the firm. These both are
dependent on the amount of Free Cash Flow.
3.7.2.1. Return on Assets:
ROA = NI / total assets
Where;
ROA is the return on assets’
NI is the net income,
And total assets.
3.7.2.2. Return on Equity:
ROE = NI / Equity
Where;
ROE is the return on equity,
12
NI is the net income,
And equity.
3.8. Control variables:
Size of the firm and financial leverage are used as control variables as was used
by the study of
3.10.1. Size of the firm:
Different studies have used different indexes for finding the size of the firm like
that of natural log of the assets or capital employed, but we have used natural log of net
sales due to the inflationary economy of Pakistan.
Size = Ln (sales)
3.10.2. Financial leverage:
It is second control variable and it is calculated using debt to asset ratio as follows.
FL = Debt/Assets
Where FL is financial leverage, Debt are total debts and Assets are total assets.
3.11. Model:
The following regression models have been used to investigate the relationship of free
cash flows and performance of the firm.
Model 1:
ROAit = β0 + β1FCFit-1 + β2SIZEit +β3FLit + eit
13
Model 2:
ROEit = β0 + β1FCFit-1 + β2SIZEit +β3FLin + eit
Where,
ROA is return on assets,
ROE is return on equity,
FCF is free cash flow,
SIZE is size of the firm,
e is error
i denote firm and t denotes year.
3.12. Hypothesis:
Main Hypothesis:
H1: There is negative relation between free cash flow and firm performance.
Sub Hypothesis:
The performance of the company is measured using return on assets and return on equity.
H1 a: There is negative relation between free cash flow and return on assets.
H2 b: There is negative relation between free cash flow and return on equity.
14
Chapter 4. Analysis:
This chapter is about the analysis of secondary data. Secondary data was analyzed
and explanatory variables were regressed using the multiple linear regression model,
which is most commonly used for relationship, cause and effect.
Based on Hausman specification test fixed effect model was found out to be the
appropriate one.
Those 20 companies were selected from cement sector of Pakistan for which data
was available. Total number of observations was 120 but some of the observations were
dropped because they were outlier, like those variables for which debt to asset ratio was
greater than 1 were dropped, because debt to asset ratio can’t be greater than 1.
Data was collected according to the following variables. For performance we used
two variables return on assets and return on equity, for size of the firm we used natural
log of sales, for leverage we used debt to assets ratio and for free cash flow we used the
following formula.
FCF = (OCF – Tax – Iexp - div) /sales
Data for these variables was collected from the financial statements and entered to
the Microsoft excel sheet and then imported to the stata software for correlation and
regression.
15
4.1. Descriptive Statistics Table:
Descriptive statistics for the sample consists of mean, standard deviation (sd), minimum
(min) and maximum (max).
Table 1. Descriptive Statistics.
(1)
(2)
(3)
(4)
(5)
VARIABLES
N
mean
sd
Min
max
ROA
104 0.0798
0.0794
-0.183
0.244
ROE
104 0.127
0.169
-0.953
0.442
SIZE
100 15.97
0.940
13.49
18.22
LEV
106 0.465
0.157
0.152
0.808
FCF
100 0.0673
0.126
-0.425
0.290
Number of
17
17
17
17
17
Companies
Note: Firms performance is measured by ROA and ROE. ROA is return on Assets; ROE is Return on equity; Size is net
sales value; Lev is leverage which is debt to asset Ratio of the firm and FCF is the free cash flow.
4.1.1. Descriptive analysis:
Mean value of return on assets is 0.0798 which is given in the table, this shows
that the average return or gain over total assets is 7.98% in cement sector of Pakistan,
16
while the standard deviation is return on assets is 0.794. The minimum and maximum
value for return on assets are -0.183 and 0.244 respectively. Mean value for return on
equity is 0.127 which shows that average gain return on equity employed is 12.7% in
cement sector of Pakistan, while the standard deviation for return on equity is 0.169. The
minimum and maximum values for return on equity are -0.953 and 0.442 respectively.
Size of the firm has been calculated through natural log of sales which is 15.97 in
this case with a standard deviation of 0.940. Minimum value of firm size is 13.49 and
maximum value of 18.22. Leverage of the firms is 0.465 which is debt to assets ratio.
This shows that on average 46.5% of the assets have been financed with total liabilities.
This shows that cement sector of Pakistan is a highly leveraged sector of Pakistan with a
standard deviation of 0.157. Minimum and maximum value of firm leverage are -0.425
and 0.290 respectively.
4.2. Correlation:
Correlation is used to show the relationship (whether positive or negative) and
significance level (significant or insignificant) of dependent and independent variables.
17
Table 2. Correlation Matrix.
ROA
ROA
1
ROE
0.8875
ROE
SIZE
LEV
FCF
1
0.000
SIZE
LEV
FCF
0.4593
0.3661
1
0.000
0.0002
-0.6298
-0.437
-0.3985
0.000
0.000
0
0.5113
0.5574
0.404
-0.4318
0.000
0.000
0.000
0.000
1
1
Note: ROA is return on assets; ROE is return on equity; Size is net sales value; Lev is debt to asset ratio; Size is the
natural log of sales and FCF is the free cash flow.
4.2.1. Interpretation of the table 2.
Return on assets (ROA) have strong positive relation with return on equity. But
the important relation is that of ROA and ROE with size, leverage and free cash flow.
ROA and ROE both have a moderate positive relation with size of the firms, but the
relation of ROA is bit stronger than ROE.
Financial leverage of the has negative relation with ROA and ROE, but the return
on assets is more negatively correlated as compared to return on equity. Return on asset
and return on equity have a moderate positive relation with free cash flow.
18
4.3. Regression:
Regression analysis is used to show that how dependent is changed in response to
independent variables. Regression analysis has also for the identification of significance
level of independent variable.
Table. 3. Regression.
(1)
(2)
VARIABLES
ROA
ROE
FCF
0.147***
0.604***
(0.0410)
(0.133)
-0.256***
-0.151
(0.0436)
(0.141)
0.0589***
0.137***
(0.0155)
(0.0502)
-0.749***
-2.026**
(0.256)
(0.827)
Observations
99
99
Hausman p-value
0.0548*
0.0148**
R-squared
0.675
0.464
Number of
17
17
LEV
SIZE
Constant
Companies
19
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Note: ROA is return on assets; ROE is return on equity; Size is net sales value;
Lev is debt to asset ratio; Size is the natural log of sales and FCF is the
Free cash flow.
4.3.1. Regression Analysis:
Coefficient value of free cash flow with return on asset (ROA) is 0.147, which
means that one percent change in free cash flow will change return on assets by 14.7%
positively. Similarly, the coefficient value of FCF and ROE is 0.604 which means that
one percent change in free cash flow (FCF) will affect return on equity by 60.4%
positively. Free cash flow has significant relationship with both return on asset and return
on equity. Free cash flow has a positive and significant relationship with return on assets
and return on equity, which means that free cash flows and firm performance are
positively related which is inconsistent with free cash flow hypothesis and agency cost
theory of Jensen (1986). But empirical evidence also exists that shows that there is a
positive relation between free cash flow and firm performance. This positive relation may
be due to the reason of information asymmetry (An, & Tuan. 2018). The agency costs of
free cash flows are out weighted by the benefits of free cash flows as cheap source of
funds. Similarly, the study of Kamran, Zhao and Ambreen. (2017) has also found a
positive relationship, the study argues that if a company is performing better, it should
have a positive value of free cash flow which is obtained by deducting all expenditure out
of income, so greater the value of free cash flows means greater value of income, which
20
means the company is performing better. This positive relation may be due to the reason
of free cash flows as cheapest source of finance (Mansourlakoraj & Sepasi. 2015).
The coefficient value of leverage with ROA and ROE are -0.256 and -0.151
respectively. This means that one percent change in leverage will affect return on asset by
25.6% negatively, increasing leverage by one percent will decrease return on asset by
25.6%. Change of one percent will affect return on equity by 15.1% negatively, but the
regression analysis shows that the relation of leverage and return on equity is
insignificant and while that of leverage and return on asset is significant. Thus, it is
concluded that the relationship of leverage and performance is negative which is in
accordance with the pecking order theory, which argues that firm first uses the internal
source of funds as it is cheap source of funds and then goes for external funds and thus
performance of the company increases. The long-term debt and total debt has negative
relation with the performance of the company (Javed, Rao, Akram, and Nazir. 2015). The
financial performance and performance indicators like ROA (return on asset) and EVA
(economic value added) has negative and significant relationship (Singh, and Bansal.
2016).
The coefficient value of size and return on asset is 0.0589, which means that one
percent change in size of the firm will affect the return on assets by 5.89%. The
coefficient value of size and return on equity is 0.137, means that one percent change in
size will affect return on equity by 13.7% positively. Size of the firm has positive and
significant relation with both return on assets and return on equity. Thus, the firm size has
positive relation with performance of the firm. In large size companies the economies of
21
production and sales increases which increases the performance of the company (Foyeke,
2015).
22
Chapter 5. Conclusion
This study investigates the relationship of free cash flows and firm performance
for cement sector of Pakistan. The data has been collected for a period for a period of six
years from 2011 to 2016, and consists of cement sector of Pakistan. Total twenty
companies were selected based on the availability of the data and out these twenty
companies three were because of their more than one debt to asset ratio. Study has used
different variables like free cash flow, size of the firm, return on assets, return on equity
and financial leverage to find the relationship of free cash flows and performance of the
firm.
Results showed that free cash flows affect the performance of the company. The
company free cash flow has positive relation with performance of the company for
cement sector of Pakistan. These results of free cash flow and performance for cement
sector of Pakistan are inconsistent with free cash hypothesis. The reason for the positive
relation may include free cash flow as cheap source of funds, information asymmetry and
greater free cash flows means greater income of firm which will attract investors. The
results showed that leverage has negative relation with performance of companies in
cement sector in Pakistan. Firm size has positive relation performance for cement sector
of Pakistan, means large size of firm are performing better than small size of firm. From
the results it is concluded that companies of cement sector will perform better if they
have large size, rarely leveraged and having large amount of free cash flows. The results
are only for cement sector of Pakistan, may have different results if tested for some other
sector of Pakistan or other country. The model used have only consider two proxies for
23
the performance of the companies, return on assets and return on equity, other proxies
can also be used for the performance of the company like that of return on stock and
tobin’s Q which may give different results.
24
References
Carroll, C., & Griffith, J. M. (2001). Free cash flow, leverage, and investment
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