The Free Cash Flow Hypothesis for Sales Growth and Firm Performance

Thomas H. Brush, Philip Bromiley and Margeretha Hendrickx

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: 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 reduces sales growth substantially, but does not increase performance from sales growth.

Keywords: Sales Growth; Agency; Free Cash Flow; Governance (search for similar items in EconPapers)
Pages: 39 pages
Date: 1998-10
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1117

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