Tests Study Of The Free Cash Flow Hypothesis Based On The View Of Audit Fees

The agency cost is the cost allocation between the ownership and use ofassets. Jensen’s FCF hypothesis is that the free cash flow will bring the agencycosts. Agency costs promote the demand for high quality audit. The companieswho have the higher agency costs, expect to spend the more expensive audit feesby employing the high reputation accounting firms to help them reduce agencycosts. Use of high-quality audit services is seen as one of the effective method tosolve the problem of the higher agency costs. Many scholars studied the problemof the agency costs which caused by free cash flow from the different perspective,found the different conclusions. However, With the rapid development of China’scapital marke, to change the actual data to re-examine the FCF hypothesis hassome practical significance.In this paper, draw on the basis of the results of theoretical studies at homeand abroad. At first, described the basic theory of FCF hypothesis, agency cost,and audit fees. On this basis, analysis the status of the agency costs of free cashflow of China’s listed companies. Then, based on the perspective of audit fees,using the method of combining empirical analysis with normative analysis,selected listed companies who audited by the "big four" audit companies(Pricewaterhouse Coopers, Deloitte, KPMG, Ernst&Young) from2006to2009inChina as a sample object. Comprehensive considered of the companies’ growthand the main influencing factors of Simunic’s audit pricing model of audit fees.Audit fees is seen as the explanatory variable, free cash flow and liabilities as anexplanatory variable. Testing the correlation of free cash flow and audit fees, theeffect of FCF hypothesis in China’s capital market. The empirical study found thatlow-growth company audit costs and free cash flow have a significant positivecorrelation, verify the applicability of the FCF hypothesis. Audit fees ofhigh-growth companies with free cash flow is related to the agency costs, but notsignificantly.Followed the liabilities and cash dividend are seen as experimentalsvariable, testing the correlation of cash dividends and audit fees. Found thatLong-term liability and cash dividends are better ways to solve the agencyproblem, It further validate FCF hypothesis in the other side. Finally, agency costsdue to free cash flow resulting from China’s listed companies raised a reasonablecountermeasures and suggestions.