Free Cash Flow, CEO Ability and Firm Performance

21 Pages Posted: 24 Apr 2017

See all articles by Ruiyun Wen

Ruiyun Wen

University of Western Ontario, Students

Date Written: April 23, 2017

Abstract

This paper examines the conflict existing between firm’s free cash flow and firm performance. As some arguments state that more free cash flow will possibly result less profitability of firm compare to no-cash-flow firms, it also tests whether high CEO ability will solve this conflicts and improve the usage of free cash flow on profitable projects rather than on investments with unprofitable return. The result is consistent with the famous agency costs theory, as it shows that firms with free cash flow perform worse from revenue growth than firms without free cash flow. While, the impact of CEO ability on revenue growth and performance varies. The impact is more significant on performance measurement of ROA than that of ROE. Management under long-tenure CEO with implied high management skills moderates the negative influence of free cash flow on performance while executives with low-tenure CEO, suggesting high CEO turnover, result in high level of revenue growth while low accounting profitability.

Keywords: cash flow, CEO ability, firm performance, revenue growth, Tobin’s Q

Suggested Citation

Wen, Ruiyun, Free Cash Flow, CEO Ability and Firm Performance (April 23, 2017). Available at SSRN: https://ssrn.com/abstract=2957340 or http://dx.doi.org/10.2139/ssrn.2957340

Ruiyun Wen (Contact Author)

University of Western Ontario, Students ( email )

London, Ontario
Canada

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