The Relationship between Free Cash Flows and Agency Costs Levels: Evidence from Tehran Stock Exchange

Abstract

The objective of this study is to examine this matter that how those firms in Iran which own a significant amountof free cash flow prevent the occurrence of its related agency problems and test the effect of dividend andleverage on free cash flow.Furthermore, there will be an examination of the difference in agency costs between companies that have andcompanies that do not have a low growth opportunity. In order to test the related hypotheses, profit, growth,leverage, size, and free cash flow were employed to measure the level of agency costs of the firms, whereasleverage and dividend were used as indices for financial policies to direct free cash flow problems. Following theusage of regression analysis and data collection of the firms in Iran over the period 2006-2010, the acquiredresults showed a positive insignificant effect of dividend on free cash flow, but they implied a positivesignificant effect of leverage on free cash flow. Regression results also indicated a positive insignificant effect offree cash flow on dividend, negative significant effect of growth on dividend and negative insignificant effect ofleverage on dividend. Meanwhile, a positive and statistically significant effect of profit and firm’s size ondividend was witnessed. For firms that have a low growth, a positive significant effect of leverage on free cashflow was observed, whereas for firms that have a high growth, results proved a positive but not significant effect.Finally, the effect of dividend on free cash flow for both categories of firms was positive but not significant.

Keywords: Agency Costs, Free Cash Flow, Dividend, Leverage