The free cash flow hypothesis for sales growth and firm performance

The paper investigates the agency argument that sales growth in pms with free cash flow (and without strong governance) is less profitable than safes growth for firms without free cash flow. It also tests whether strong governance conditions improve the performance of firms with free cash flow and/or limit the investments in unprofitable safes growth. Consistent with agency theory, firms with free cash flow gain less from safes growth than firms without free cash flow. But different governance conditions affect sales growth and performance in different ways. Having substantial management stock ownership mitigates the influence of free cash flow on performance, despite allowing higher sales growth. In contrast, outside blocks held by mutual funds reduce sales growth substantially, but does not increase performance from sales growth. Copyright (C) 2000 John Wiley & Sons, Ltd.