Does Free Cash Flow Problem Contribute to Excess Stock Return Synchronicity?

28 Pages Posted: 21 Jul 2014

See all articles by William M. Cheung

William M. Cheung

University of Macau

Li Jiang

Hong Kong Polytechnic University

Date Written: July 4, 2014

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.

Keywords: Free cash flow problem; Stock return synchronicity; Opaqueness; Discretionary accruals

JEL Classification: G14; G34

Suggested Citation

Cheung, William Ming Yan and Jiang, Li, Does Free Cash Flow Problem Contribute to Excess Stock Return Synchronicity? (July 4, 2014). Review of Quantitative Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2468767

William Ming Yan Cheung (Contact Author)

University of Macau ( email )

Macau

Li Jiang

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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