The Impact Of Free Cash Flow On Agency Cost Of GEM Lists Companies In China

A number of accounting scandals abroad have triggered the crisis of confidencein accounting profit. Profit manipulation can be found in many companies in ourcountry, even listed companies. Therefore, the reliability of current financial theoryresearch based on accounting profit, to some extent, remains to be examined.Naturally, a new concept, free cash flow, has brought great attention to the academiccircle and the practical circle. Meanwhile, with the expansion of enterprises, theseparation of ownership and managerial authority becomes inevitable. Consequently,with the inconsistency in the objectives of interests between the owner and themanager in the principal-agent relationship between shareholders and managers, thismodel would lead to the arising of agency cost caused by moral hazards, such ascompany-paid consumption, over-investment and undercapitalize etc. Free cash flowhypothesis holds that the higher level of free cash flow means the higher possibility ofthe managers’ abusing the free cash flow. Therefore, effectively reducing themanagers’ control power and the agency cost is an issue concerned by every investor.Since its foundation in2009, GEM (growth enterprise market) has enjoyed a highgrowth opportunity whose listed companies are most engaged in high-tech businesses.Favored by its limited established time, small scale and high risks, the structure of itsfree cash flow has obvious differences with that of main board listed companies.Additionally, most of the GEM listed companies share the family-corporationbackgrounds, hence their agency-related problems have distinctive characteristics.Therefore, whether the agency cost of GEM listed companies is affected by the freecash flow or not is worthy of our study. This paper explores the impact of free cashflow on the agency cost of GEM listed companies, thus comprehensively understandsthe agency-related problems of GEM listed companies, and proposes policysuggestions in establishing a reasonable mechanism of corporate governance.Through theoretical analysis, this paper firstly introduces the meaning of the free cash flow and the agency cost theory. Afterwards, this paper conducts an empiricalresearch on the impact of free cash flow on the agency.The results show a significantpositive correlation between the free cash flow and the agency cost of GEM listedcompanies. While with the growing of the scale of the company, the agency-relatedproblems gradually revealed. Therefore, the reasonable management mechanismshould be introduced to the GEM listed companies and incentive policies should beimproved to ensure their sound and long-term development.