Majority Ownership and Enterprise Value: Free Cash Flow Hypothesis Testing

Abstract

This study examined the free cash flow hypothesis. The manager, with the authority which is granted by the enterprise owners, can make use of the internal funds in the enterprise to make investment less profitable for the shareholders so that the enterprise owners need some oversight on policies made by the managers in this regard. This study then examined and analyzed the influence of operating cash flow on enterprise investments and debt which had impact on the increase or decrease of enterprise value. The study employed majority ownership as the moderating variable for the correlation between (1) operating cash flow and investments as well as (2) the correlation between operating cash flow with debt. The sample of this study comprised 94 manufacturing enterprises which were selected based on certain research criteria during the period of 2000 to 2013. This study also used three simultaneous equations. Also, the regression analysis technique used was the three-stage least squared (3-SLS). These results indicated that the presence of majority ownership in the enterprise could act as a control mechanism to evaluate the decisions made by the enterprise management that would enhance enterprise value.

Keywords: free cash flow hypothesis, operating cash flow, investment, debt, enterprise value, majority  ownership.