Extended Abstract A Study of the Interaction between Free Cash Flow and Performance of Companies Listed in Tehran Stock Exchange Using a Three-Stage System of Simultaneous Equations (3SLS)

This study examines the contrast between free cash flow and performance, along with other factors affecting this relationship. In other words, this study is investigating the interaction of (bilateral) between free cash flow and performance and also identifies factors enhancing this relationship. As a result, this study is seeking to provide a practical approach in the determination of free cash flow in order to maximize corporate value and examines the importance of free cash flow and the company's performance more precisely.
Research Hypotheses: According to the research, theory and literature, there is a mutual and bilateral relationship between free cash flow and the company's performance. If one changes, the other will be affected. In addition, there are other variables that affect this relationship. Therefore, the hypothesis of the study is as follows:A. Hypothesis related to endogenous variables (free cash flow and performance):1. There is a reciprocal and significant relationship between free cash flow and performance.
B. Hypotheses related to exogenous variables:2. There is a reciprocal and significant relationship between free cash flow and debt policy
3. There is a reciprocal and significant relationship between free cash flow and size of the company
4. There is a reciprocal and significant relationship between free cash flow and concentration of ownership
5. There is a reciprocal and significant relationship between free cash flow and level of ownership
6. There is a reciprocal and significant relationship between free cash flow and managerial ownership
7. There is a reciprocal and significant relationship between free cash flow and governmental ownership
Research The semi-empirical method for the period from 1380 to 1392 which included 1716 companies in Tehran Stock Exchange was used with the panel data. Also, because of the simultaneous bias in endogenous variables a three-stage system of simultaneous equations (3SLS) was used to test the hypothesis. The variables of this study are endogenous and exogenous variables. Free cash flow and performance variables have the mutual influence on each other, and also are influenced by other variables. Therefore, they have the role of endogenous variables in the system. But, other variables (debt policy, the size of the company, the level of institutional ownership, institutional ownership concentration, managerial ownership and state ownership) only posit an effect on endogenous variables and are not affected by other variables so their role is exogenous.
The results of testing the hypothesis showed a significant and negative effect of the performance on free cash flow and also free cash flow have significant and negative effect on the performance. So, these two variables are weakening each other. In addition, the results showed a significant and different effect of unipolar and multipolar ownership structures on the above relationship. In other words, unlike the ownership concentration variables which create a unipolar power in the firm, the level of ownership as a multipolar power could have value-creating effect on the relationship between free cash flow and performance.
Discussion and Given that the effect of institutional ownership concentration on performance variable is negative and significant, it is concluded that when there is a dominant power in the company, it could not be value-creating for the company. It means this power applies generated cash flow to their personal interests. On the other hand, the positive effects of levels of institutional ownership on performance suggested that when many kinds of power existed in a company, they prevent creating unused cash flow, and cash flow would be directed to the projects with a high return. Therefore, based on the result of the study, it is suggested for value maximizing of the company that the level of institutional ownership to be increased. The results of this study are in accordance with Jensen’s theory of free cash flow, approving the impact of liabilities policy on the free cash flow management. Furthermore, the results showed that the volume of operations, and in turn the growth opportunities, are the enhancing factor for directing the free cash flow to the suitable projects.