Abstract: Investment decision is one of important components of modern financial management which determines the company’s future direction for developing and source of value growth. Investment decision can affect not only the company’s financing decision and dividend decision directly, also its profitability, operational risk and development prospect. The evaluation of the investment efficiency is an important standard to judge the success or failure from the investment. It not only plays a decisive role in the sustainable development of the company, also affects and reflects the operational efficiency of the nation's financial system from a macro perspective. But for many reasons, the company's investment decisions can't always be high efficiency like shareholders expect, and the goal of maximizing enterprise value is not so easy that every company can achieve. Subjectively, the existence of moral hazard and adverse selection often makes managers tend to make decisions that work best for themselves rather than for maximizing enterprise value. Objectively, the managers maybe make inefficient investment decisions because of imperfect company’s governance structure, macro-economy overheating and low efficiency of country’s financial system that it damages the value of the company. Regarding the enterprise investment efficiency, scholars both domestic and overseas have made abundant research, which provides the beneficial guidance and theoretical support for this paper.
In this paper, it has learned from the research results of scholars at home and abroad based on the agency theory. Firstly, the forecast model about the variable investment spending is set up to identify under-investment and over investment, two types of inefficient investments. Secondly, Starting from the index of free cash flow, combining different enterprise environments and evaluating whether the relationship between free cash flow and investment spending under the condition of different enterprises have significantly different. Lastly, the research about the above referred will be extended to the enterprise value. We will analysis whether the relationship among the three aspects have any significant changes under different business environments. In this paper, we select the machinery and equipment manufacturing industry in China manufacturing industry as the sample. This industry started early. Companies’ differences in this field are limited though their sizes are general large-scale. This industry’s speculative is weak and not having obvious industrial characteristics though there are many companies. All of these have great benefits for our systemic research combined with enterprise financial indexes.
In this paper, we do our research by using methods like correlation, descriptive analysis and multiple regression analysis and so on. The results show that, the excessive investment does have more relevant with positive free cash flow, but this revelation will vary with the change of enterprises’ operation ability. And the indexes of the enterprises’ operation ability can also affect the relationship among investment spending, free cash flow and enterprise value.
Of course our research has limitations in some way in this paper. For examples, the accuracy of the expected investment model needs further assessment and improvement, the grouping method in comparative study is comparing single, do the investigation without the external factors of enterprise, etc. These limitations are places where to improve and break through for our research.
Keywords: Free cash flow; moderate risk investment; inefficient investment; entereprise value.
Title: Correlation analysis among Free Cash flow, Investment Expenditure and Corporation Value
Author: Yan Wang, Qiao Ming Li
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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