Analyzing the impact of Free Cash Flow on Firm Performance

Abstract

Abstract: The aim of this research is to examine the impact of free cash flow on firm performance through the mediating effect of dividend policy also, to examine the moderating effect of agency cost on the relationship between the free cash flow and firm performance. An empirical analysis on the non-financial firms listed in EGX 100 from 2013 to 2022 was applied in Egypt. Free cash flow was the independent variable and it was measured by free cash flow equation which is deducting taxes, interest expenses, common stock dividends, operating cash flow, and preferred stock dividends all divided by net sales. While, form performance was the dependent variable and it was measured by stock return as market-based measurement and by return on assets as an accounting-based measurement. The generalized method of moments (GMM) panel estimate method was conducted for examining 610 observations during the selected time span. The findings demonstrated that free cash flow significantly increase the firm performance as a company with strong cash flow usually brings in additional investors, which will raise the company's capital. Moreover, the research analyzed that agency cost significantly moderates the relationship between free cash flow and firm performance.