Analysis On The Correlation Between Free Cash Flow, Investment Expenditure And Enterprise Value

There are three important parts of modern financial management which includes investment decision, financing decision and dividend policy. The investment decision determines the company’s direction of future development and source of value growth, which can affect not only the company’s financing decision and dividend decision directly, but also its profitability, operational risk and development prospect. The discretion of the investment efficiency is an important standard to judge the success or failure of the investment. It not only plays a decisive role in the sustainable development of the company, but also affects and reflects the operational efficiency of the nation’s financial system from a macro perspective. But for many reasons, the company’s investment decisions can’t always be high efficiency like shareholders expect, and the goal of maximizing enterprise value is not so easy that every company can achieve. Subjectively, the existence of moral hazard and adverse selection often makes managers tend to make decisions that work best for themselves rather than for maximizing enterprise value. Objectively, the managers may make inefficient investment decisions because of imperfect company’s governance structure, macro-economy overheating and low efficiency of country’s financial system. So that the value of the company can be damaged. Regarding the enterprise investment efficiency, both domestic and overseas scholars have made abundant research, which provides the beneficial guidance and theoretical support for this paper.In this paper, it has learned from the research results of scholars at home and abroad based on the agency theory. Firstly, the forecast model about the variable investment spending is set up to identify under-investment and over-investment, two types of inefficient investments. Secondly, starting from the index of free cash flow, combining different enterprise environments and evaluating whether the relationship between free cash flow and investment spending under the condition of different enterprises have significantly different. Lastly, the research about the above referred will be extended to the enterprise value. It has analyzed whether the relationship among the three aspects have any significant changes under different business environments. In this paper, it has selected the machinery and equipment manufacturing industry in China manufacturing industry as the sample. This industry started early. Companies’ differences in this field are limited though their sizes are general large scale. This industry’s speculative is weak and not having obvious industrial characteristics though there are many companies. All of these have great benefits for our systemic research combined with enterprise financial indexes.In this paper, we do our research by using methods like correlation, descriptive analysis and multiple regression analysis and so on. The results show that, the excessive investment does have more relevant with positive free cash flow, but this revelation will vary with the change of enterprises’debt paying ability, operation ability, profitability, developing ability and stock proportion restriction. And the indexes of the enterprises’debt paying ability, operation ability and so on can also affect the relationship among investment spending, free cash flow and enterprise value.Of course the research has limitations in some way in this paper. For examples, the accuracy of the expected investment model needs further assessment and improvement, the grouping method in comparative study is comparing single, making the investigation without the external factors of enterprise, etc. These limitations are places where to improve and break through for future research.