Examining Free Cash Flow Theories in the Non-Financial Sector of Pakistan: A Comprehensive Analysis of PSX-Listed Non-Financial Firms

Abstract

The aims of this research were to analyze free cash flow related theories in the non-financial sector of Pakistan namely agency theory, Pecking order theory, and static trade-off theory. Free cash flow was taken as dependent variable along with three independent variables (Tax rate, leverage, and retention). Moreover, firm’s size, growth, dividend, tangibility, profitability, and cash flow volatility were taken as controlling variables. The data were extracted from four hundred eighty-eight non-financial firms listed on PSX for the period of 20 years, i.e., 2001-2020. We used weighted least square model for analysis due to heteroscedasticity diagnosed in data set. The study found that free cash flow is negatively related to leverage and tax, while the relationship with retention is positive. The results of this study are consistent with the hypothesis of agency theory, trade-off theory, and pecking order theory. This study is of paramount significance in comprehending the intricacies of free cash flow theories within the non-financial sector of Pakistan. The findings derived from this analysis have the potential to make substantial contributions to the enhancement of strategic financial management practices.