Is Free Cash Flow Value Relevant? The Case of the U.S. Financial Institutions Sector

Abstract

This study attempts to determine whether free cash flow (FCF) is value relevant for the U.S. Financial Institutions Sector (FIS) and, if so, which FCF is the most value relevant. The results may help investors make better decisions and may encourage accounting standards setters to require FIS firms to use a specific definition of FCF to enhance comparability. Using a sample of 11,662 observations for the period 1988 to 2012, the study shows that FCF defined as cash flow from operations less cash flow for investing activities less cash outflow for preferred stock dividends is the most value relevant for the FIS.