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The Free Cash Flow Hypothesis for Sales Growth and Firm Performance

Author

Listed:
  • Brush, Thomas H.
  • Bromiley, Philip
  • Hendrickx, Margeretha

Abstract

The paper investigates the agency argument that sales growth in firms with free cash flow (and without strong governance) is less profitable than sales growth for firms without free cash flow. It also tests whether strong governance conditions improve the performance of firms with free cash flow and/or limit the investments in unprofitable sales growth. Consistent with agency theory, firms with free cash flow gain less from sales growth than firms without free cash flow. But different governance conditions affect sales growth and performance in different ways. Having substantial management stock ownership mitigates the influence of Free Cash Flow on performance, despite allowing higher sales growth. In contrast, outside blocks held by mutual funds reduces sales growth substantially, but does not increase performance from sales growth.

Suggested Citation

  • Brush, Thomas H. & Bromiley, Philip & Hendrickx, Margeretha, 1998. "The Free Cash Flow Hypothesis for Sales Growth and Firm Performance," Purdue University Economics Working Papers 1117, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1117
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    Cited by:

    1. Ouidad Yousfi, 2007. "Le rôle de la dette dans le LBO : une revue de la littérature," Working Papers hal-04139236, HAL.
    2. Ouidad Yousfi, 2007. "Le rôle de la dette dans le LBO : une revue de la littérature," EconomiX Working Papers 2007-8, University of Paris Nanterre, EconomiX.

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