A Research into the Relationship between Free Cash Flow and Capital Structure-Based on Empirical Analysis of Small and Medium-sized Enterprises

As one of the most widely-used target in the domain of enterprise value appraisal,free cash flow is believed in modem theories to be closely related to enterprise value. Meanwhile enterprise value is influenced by capital structure. Then is there a direct correlation between free cash flow and capital structure? If there is,what kind of influence will the change in free cash flow have on enterprise capital structure at last? Both of these questions are worth exploring. By using data of 38 Chinese small and medium-sized listed enterprises (SMEs for short hereafter) from 2005 to 2007 as samples, we did empirical research into the relationship between their free cash flow and capital structure,which includes debt-equity ratio and debt maturity structure. The research shows that for listed SMEs free cash flow has positive but insignificant correlation with debt-equity ratio and meanwhile as expected it has negative correlation with debt maturity structure.