Is Free Cash Flow Value Relevant? The Case of the Information Technology Industry

Abstract

This study attempts to determine whether free cash flow (FCF) is value relevant for the information technology industry and, if so, which FCF is the most value relevant. The results would help retail investors make better decisions, and may encourage accounting standards setters to require information technology companies to use a specific definition of FCF to enhance comparability. Using a sample of 18,399 observations covering the period from 1988 to 2012, the study shows that the FCF defined as “cash flow from operations less capital expenditures less preferred stock dividends” is the most value relevant for the information technology sector