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Review of Quantitative Finance and Accounting

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01-01-2016 | Original Research

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

Authors: William Mingyan Cheung, Li Jiang

Published in: Review of Quantitative Finance and Accounting | Issue 1/2016

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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.

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We thank the reviewer to point this out. Our results are qualitatively similar when FCF is scaled by total assets.

See Chen et al. (2001), and Chen and Fu (2011) for the use of Tobin’s q as a growth measure for Taiwan firms.

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Title: Does free cash flow problem contribute to excess stock return synchronicity?
Authors: William Mingyan Cheung
Li Jiang
Publication date: 01-01-2016
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 1/2016
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-014-0464-2

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