What determines firm value has been extensively discussed in the corporatefinance field. Operation and profit condition are critical characters. Becausemanagement of listed companies might have incentives to smooth performance byearnings management, the market always identifies their cash flow volatility andvalues them accordingly. This study takes all A-share listed non-financial companiesduring2003-2009as a sample to establish an independently pooled cross sectionaldata. By multi regression analysis, the paper finds that when cash flow volatilityincreases by1%, firm value decreases by0.05%and the result is statisticallysignificant. Furthermore, China’s share split reform starting from2005has enhancedthis negative impact. The mechanism analysis shows that cash flow volatility hurtsfirm value mainly by increasing external financing costs. The results imply that firmmanagers should focus more on maintaining low operating volatility through riskmanagement. |