Free cash flow, productivity gains, growth and sustainability – the agency problem revisited Online publication date: Mon, 26-Sep-2022
by Tamal Datta Chaudhuri; Subhalaxmi Nath; Sucharita Sarkar
International Journal of Business Innovation and Research (IJBIR), Vol. 29, No. 1, 2022
Abstract: The objective of the paper is to examine the extent of the agency problem in the Indian manufacturing sector. We relate free cash flow to business efficiency, business effectiveness, innovativeness and sustainability of a sample set of companies. We choose metrics for each of the factors and examine the extent of the relationship. For evaluating performance of companies, we use economic profit and returns on retained earnings. While free cash flow has not improved the asset turnover ratio, it has led to improvements in the productivity of capital over a longer time period. Interestingly we observe a positive relationship between free cash flow and the P/E multiple implying that the market has favoured those companies with higher economic moat. A positive relationship is observed between returns on retained earnings and free cash flow over a period of time, and this does not support the agency problem.
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