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Does free cash flow problem contribute to excess stock return synchronicity?

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Listed:
  • William Mingyan Cheung

    () (University of Macau)

  • Li Jiang

    () (Hong Kong Polytechnic University)

Abstract

Abstract We investigate whether Jensen’s free cash flow problem contributes to excess stock return synchronicity. We find that low-growth firms with high free cash flow have greater stock return synchronicity. These firms also engage in earnings management to lower their disclosure quality. To the extent that free cash flow for low-growth firms provides corporate insiders an opportunity to extract private control benefit, our findings lend direct and concrete support to Jin and Myers (J Financ Econ, 79:257–292, 2006) prediction that insiders increase opaqueness to capture cash flow beyond the level expected by outsider investors. We identify Jensen’s free cash flow problem as an important driver for stock return synchronicity.

Suggested Citation

  • William Mingyan Cheung & Li Jiang, 2016. "Does free cash flow problem contribute to excess stock return synchronicity?," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 123-140, January.
  • Handle: RePEc:kap:rqfnac:v:46:y:2016:i:1:d:10.1007_s11156-014-0464-2
    DOI: 10.1007/s11156-014-0464-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Free cash flow problem; Stock return synchronicity; Opaqueness; Discretionary accruals;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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