The free cash flow hypothesis for sales growth and firm performance

Thomas H. Brush, Philip Bromiley and Margaretha Hendrickx

Strategic Management Journal, 2000, vol. 21, issue 4, 455-472

Abstract: business is business! And business must grow –Dr. Seuss, The Lorax The paper investigates the agency argument that sales growth in firms with free cash flow (and without strong governance) is less profitable than sales growth for firms without free cash flow. It also tests whether strong governance conditions improve the performance of firms with free cash flow and/or limit the investments in unprofitable sales growth. Consistent with agency theory, firms with free cash flow gain less from sales growth than firms without free cash flow. But different governance conditions affect sales growth and performance in different ways. Having substantial management stock ownership mitigates the influence of free cash flow on performance, despite allowing higher sales growth. In contrast, outside blocks held by mutual funds reduce sales growth substantially, but does not increase performance from sales growth. Copyright © 2000 John Wiley & Sons, Ltd.

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (112)

Downloads: (external link)
https://doi.org/10.1002/(SICI)1097-0266(200004)21:43.0.CO;2-P

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:stratm:v:21:y:2000:i:4:p:455-472

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0143-2095

Access Statistics for this article

More articles in Strategic Management Journal from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().