Impact of Free Cash Flow (FCF) on Firm Performance: Evidence from Pakistan

Abstract

According to free cash flow (FCF) theory, there is a negative correlation between a manager's restriction of FCF and company performance. It suggests that dividend payouts and debt financing tend to decrease the FCF, resulting in enhanced company performance. To examine this hypothesis, a study was conducted in Pakistan that focused on non-financial companies listed on the Pakistan Stock Exchange PSX. The research employed stratified sampling technique by selecting 28 companies. Data was collected from the time period 2013-2017. The data obtained from the State Bank of Pakistan (SBP) and financial statements from company websites served as primary sources. The study considered variables, that is, FCF, dividend per share, leverage (LEV) (as independent variables), return on assets (ROA) (as the dependent variable), and capital liquidity along with firm size (as control variables). Panel regression analysis utilizing EViews was used for data analysis. Findings showed that both FCF and dividend payouts have a significant and positive impact on firm performance, while LEV does not exert a significant effect. Moreover, firm size was identified as having a significant negative impact on firm performance. The outcomes of the current study hold potential value for both foreign and local investors as well as for companies aiming to establish robust dividend policies.