The Impact of Free Cash Flow and Agency Costs on Firm Performance
This paper investigates the impact of free cash flow and agency costs on firm performance. Indeed, this study
aims to re-examine the free cash flow hypothesis and the agency theory. With the data of publicly listed companies on
French Stock Exchange, our results show that there are positive impacts of free cash flow on agency costs. The presence of
free cash flows could increase the incentive for management to invest in destructive value projects thus leading to an
increase in agency costs.
This study shows that there is a positive relationship between free cash flows, operating performance and firm value. These
results support the free cash hypothesis, meaning that free cash flow could generate more values for the firm. Among the
proxy variables of agency costs, R& D ratio and operating income volatility are statistically significant to firm value. This
research tries to find a better explanation of the relationship between free cash flow, agency costs and firm performance.
Keywords: Free Cash Flow Hypothesis, Free Cash Flows, Agency Costs, Firm Performance