Free Cash Flow Hypothesis In Our Adaptability Empirical Research

This paper verified the application of free cash flow hypothesis for listed companies in our country, by exploring if the free cash flow hypothesis can explain the phenomenon, that companies conducting seasoned equity offerings experience a decline in operating performance subsequent to issuing equity.Firstly, this paper introduces the concept of free cash flow and the free cash flow hypothesis; Secondly, this study describes the tendency features of operating performance and the associated factors, and the relation between them in the time-series of ex-post offerings. At the same time, the basic views of free cash flow hypothesis are examined tentatively. Finally, with regard to the decline in operating performance following issuing, this paper explores the relation between pre-offer determinants and the changes in operating performance around SEOs, in the cross-sectional analysis by general regression mode and stepwise regression mode.The result documents that the SEO companies experience a sharp, statistically significant decrease in profitability following offerings, and the operating performance declines by a big margin. That is consistent with the free cash flow hypothesis and proves the existing of agency cost between managers and shareholders. First, the level of free cash flow could indicate the level of agency cost, which is consistent with core point of the hypothesis. Second, the size of assets and growth of firms cannot indicate the existence of agency cost. The small-size firms and high-growth firms have a slight decrease, which supports the information asymmetry theory and in opposite to FCF hypothesis. Third, the firm leverage and size of investment in PPE (properties, plants, equipments), which are two means used to constrain managerial behavior, fails to reduce the agency cost. Oppositely, higher-leverage firms and more-investment-PPE firms have greater decline in performance.Our study improves earlier work, and examines the ability of FCF hypothesis to explain the decrease in operating performance of listed companies more roundly. After analyzing the reasons that FCF hypothesis can't interpret the decreasing phenomenon in performance, corresponding suggestions are given to securities regulatory committee, companies and investors.