Study Of The Impact Of Free Cash Flow On Share Pricing Of Listed Companies In China

Net profit plays an important role on stock pricing based on the PEvaluation method. Scholars have found that net profit has information contentand there is significantly positive correlation between net profit and stockprice to confirm the pricing function.Since the late1980s, the West put forward the concept of free cash flow,the theory study developed rapidly in China. However, the use of FCF invaluation is limited due to the complex valuation model and no direct FCFinformation in the financial reports. Until recent years, especially after thefinancial crisis in2008, the concept of "Cash is king" gradually attractedpeople’s attention. More and more people are concerned about the listedcompany’s FCF information. And the FCF valuation model is usedmore.Whether the role of FCF in the stock pricing is significantly upgraded? The article uses the data sample from2008to2012of companies listed onShanghai and Shenzhen, to study the relationship between free cash flow andnet profit, the correlation between free cash flow and stock price, and theinformation content of free cash flow. The empirical study found that:(1) thenet profit of listed companies is generally greater than zero, but free cashflow is significantly less than net profit, or even negative. The reasons thatnet profit and free cash flow deviate are different by different industries(2)insome years, the correlation of share price and FCF is statistically significant,indicating that investors are also beginning to care about listed company’sFCF, especially the cash flow of operating activities, investing activities andfinancing activities. Correlation between share prices of different industriesand FCFs is not entirely the same.(3) within the time frame selected, FCFdoes not have significant information content, and Lock phenomenon ispresent in China’s stock market.