Information Content for Free Cash Flow

Abdel Razzaq H. Salem, Husein A. Khasharmeh

Abstract


This Study aims at testing the information content of free cash flow. The main objectives of this study can be summarized as following:

1- Testing information content of both free cash flow for equity and firm.

2- Testing relative and incremental information content of free cash flow for equity compared with accounting earnings and net cash flow from operations.

3- Testing relative and incremental information content of free cash flow for firm, compared with accounting earnings and net cash flow from operations.

The study sample consisted of (329) observations firm/year, for 58 Jordanian industrial corporations listed in Amman Bourse, over the period from 1998 to 2003. The study utilizes simple and multiple regressions models to test its hypothesis.

The study concluded that free cash flow has information content, and the information content of both accounting earnings and net cash flow from operations are superior to free cash flow's information content. Finally, it found that free cash flow for equity has incremental information content beyond accounting earnings, but does not have incremental information content beyond net cash flow from operations.

Based on these results, the study recommended that investors, financial analysts and managers should adopt a set of different measures (cash and accrual-based measures) to evaluate company performance, as well as pay attention to free cash flow for equity. The study also suggested that it would be beneficial to Jordanian industrial corporations to disclose free cash flow for equity.


Keywords


Free Cash Flow, Information Content, Relative and Incremental Information Content.

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