The Effect of Free Cash Flows on Company Value: Dynamic Panel Data Analysis on BIST 100 Index in The Context of Free Cash Flow Theory

Abstract

Each passing day more companies go public to reach new financial sources, to increase credibility, to institutionalize, to gain recognition and thus transform into a structure with many shareholders. Along with increasing number of shareholders, separation between ownership and management arise, which comes with several problems. According to Free Cash Flow Theory the main source of agency costs is free cash flow and free cash flows decrease the value especially in companies having low growth opportunities. In this article dynamic panel data analysis has been performed by using 2002-2016 data of 49 companies in BIST 100 Index. Results of analysis in which Tobin’s q as proxy for company value has been selected as dependent variable and Arellano-Bond difference and Arellano-Bover system generalized method of moments (GMM) estimators have been used show that there is a negative relationship between free cash flows and company value. The results support Free Cash Flow Theory in Turkey.