Test Of Agency Cost In Free Cash Flow Based On Dividend Policies Of Listed Companies

Free Cash Flow Hypothesis, as one of the core content of modern company'sfinance theories, studies the agency cost of cash resources. It thinks that cashrepresents a higher agency cost in a low-growth company, and cash resources, nomatter wasted on the management's on-the-job consumptions or invested in theproject without profitability prospect, are an integral part of a company's agency cost.Combining Agency Cost Theory with Company's Finance Theory, this paperanalyzes industrial characteristics of agency problem in free cash flow and company'sdividend policies and investment policies while illustrating Free Cash FlowHypothesis and empirical studies. The author chooses Chinese alcoholic industrywhich always enjoys satisfactory benefits as subject, and takes 41 no dividenddistributions events and 31 cash dividend payments events of 12 listed companies inthe industry from 1994 to 2004 as samples. By adopting the event study methodology,the author investigates the agency problem in free cash flow arising during dividenddistribution of listed companies in the industry. The study result reveals that nodividend distribution announcements led to negative accumulative abnormal return,while cash dividend payment gave rise to positive one. The test result basicallysupports f Free Cash Flow Hypothesis, and proves the existence of agency problem infree cash flow in China's alcoholic industry.According to the above conclusion, this paper probes into relevant financialpolicies(i.e. cash dividend, stock buyback, debt financing and enhancement ofrelativity between management's reward and performance) and law policy of cashdividend for decreasing agency cost in free cash flow, from which those listedcompanies with satisfactory profits and sufficient cash flows can benefit in corporategovernance.