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The impact of free cash flows and agency costs on firm performance — An empirical analysis of KSE listed companies of Pakistan

Author

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  • Waqas Bin Khidmat

    (GC University, Faisalabad, Pakistan)

  • Mobeen Ur Rehman

    (COMSATS University, Islamabad, Pakistan)

Abstract

The purpose of this research is to find out the impact of free cash flows and agency costs on firm performance in KSE listed companies of Pakistan. A sample of 123 companies listed on KSE representing eight different sectors has been analyzed to determine the association of free cash flows, agency costs and firm performance with each other. For the purpose of analysis, secondary data of selected companies for the period 2003–2009 has been taken from balance sheet analysis of joint stock companies (BSA) issued by State Bank of Pakistan (SBP). Free cash flows have been calculated as by Poulsen (1993) and Lang et al. (1991) while four proxy variables for agency costs are used (Wang, 2010) to assess their relationship with each other and with the firm performance. Results showed that there is a significantly positive relationship between free cash flows and agency cost. Free cash flows have significantly negative impacts on firm performance. The study also shows a significantly negative impact of agency cost on firm performance with exception to total asset turnover (TATO) ratio which has a positive impact. In Pakistani context, the minority shareholders are exploited by the majority shareholders and the management so the government with the help of this study can devise such rules of corporate governance in which the agency cost can be controlled. The investors also are benefitted from this study as they can efficiently manage their portfolio while looking at the impacts of agency costs and firms free cash flows. So this study enables us to better understand the linkage between agency cost, free cash flows and performance measures.

Suggested Citation

  • Waqas Bin Khidmat & Mobeen Ur Rehman, 2014. "The impact of free cash flows and agency costs on firm performance — An empirical analysis of KSE listed companies of Pakistan," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 1-25.
    • Handle: RePEc:wsi:jfexxx:v:01:y:2014:i:03:n:s2345768614500275
    DOI: 10.1142/S2345768614500275
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    Cited by:

    1. Ujjayini Roy & Indrani Chakraborty, 2023. "Market concentration, agency cost and firm performance: a case study on Indian corporate firms," Economic Change and Restructuring, Springer, vol. 56(4), pages 2645-2693, August.
    2. Haroon ur Rashid Khan & Waqas Bin Khidmat & Osama Al Hares & Naeem Muhammad & Kashif Saleem, 2020. "Corporate Governance Quality, Ownership Structure, Agency Costs and Firm Performance. Evidence from an Emerging Economy," JRFM, MDPI, vol. 13(7), pages 1-35, July.

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