Free Cash Flow And Corporate Performance Empirical Research

As a new financial concept, the free cash flow has been put forward and used for more than twenty years. From the whole company's aspect, free cash flow is considered by enterprise the extra cash flow whose operating activities cash flow minus the capitalized expense required for keeping its current production capacity; it is the largest cash for the capital providers that will not influence the lasting development of company. Therefore, free cash flow uses the cash basis and puts the important financial problems such as operating, investing, financing and dividend distribution into consideration, which makes it effectively avoid the defect of traditional evaluation indexes and reflect the listed company's performance based on the value creation capacity comprehensively.Inspired by this, the thesis adopts a method of the combination formal research and empirical research, on the basis of sorting and analyzing the two current theories about the correlation between free cash flow and corporate performance, then, proposes the thesis's assumption to be certificated—compared with inadequate or excessive free cash flow, the company has best performance when it owns moderate free cash flow. The empirical research uses Chinese biology pharmaceutical listed companies as a sample in the study, with their financial reports from the year of 2003 to 2007, having a regression test to the relationship between the free cash flow and the business performance of the listed companies. The study shows that a parabolic curve exists between the free cash flow and corporate performance. That is to say, with the increasing of free cash flow, the performance of the enterprise will go up accordingly. However, when the corporate performance has been achieved at a certain point, it will decrease with the free cash flow's continual increasing.Based on the conclusion above, the thesis suggests that the managers of the listed companies should pay attention to the free cash flow and control the capitalized expense in order to guard against financial risks and enhance the management level, especially in the integration and expansion of the industry. As for the investors, the thesis believes that investment and evaluate corporation's performance should consider the factors of present level in the industry and its own scale to analyze the company's free cash flow comprehensively in order to avoid possible investment risks and loss caused by the company's low efficiency when it owns inadequate or excessive free cash flow.