Free Cash Flow, Financial Constraint And Corporate Value Added

Free cash flow has been played an important role in the enterprises. It not only has an effect on the company’s operating decisions, but also affect the future development of our enterprises. Since Jensen put forward the free cash flow hypothesis, scholars have conducted extensive research on it. On the one hand, in the process of creating value by investing to enterprise business production activities, its free cash flow is an essential driving force to ensure the value increase. Holding sufficient free cash flow to ensure that enterprises cannot miss the best investment opportunities, but also reduces the risk of financing constraints which enterprises faced. So that business value can be healthy and efficient growth. But on the other hand, agency costs, such as information asymmetry and moral hazard, of free cash flow also will have a negative impact on corporate value. The difference between management’s interests and owner’s will reduce the enterprise value. Under our contemporary reality, the Chinese capital market is still in a growth stage, the agency cost problems such as excessively expense in-office and over-investment have become a serious phenomenon. Therefore it is necessary to research how free cash flow affects enterprise value growth and take the financing constraints and equity nature into consideration at the same time. So we can verify the correlation between free cash flow and corporate value added under different company conditions. The research results will make recommendations for future enterprises optimize their free cash holdings and reference a new idea to maximize enterprise value.Firstly, we introduced related research results on the value of free cash flow and clarified the relationship between free cash flow and the company value. Moreover, we proposed to use value-added as to evaluate company value. Then based on the classical theories such as information asymmetric theory, financing constraints theory and agency theory, we put forward the research hypothesis. By taking the entire2009-2012China A-share listed companies’financial data from CSMAR database as the sample, we established the panel model by S TATA12software. From the perspective of external financing constraints and the internal owner nature view, research has examined the different free cash flow value-added affects under the financing constraints and the owner nature conditions. Finally, the study found an inverted U-shaped relationship between the corporate value-added and its free cash flow holding. When the company value increases to a certain extent with the increase of free cash holdings, a higher free cash flow holding agency cost problem will cause a significantly inhibition of its value increased efficiency. And even in the left part of the U-curve relations, while the higher financing constraints reduce agency costs of free cash flow, it will also suppress the value increased effects.In addition, increasing effects of non-state-owned enterprises is more obvious than those of state-owned enterprises, indicating that the agency costs of free cash flow problem in state-owned enterprises cannot be ignored, and the reform process of state-owned enterprises still need to keep.