FREE CASH FLOW AND PERFORMANCE PREDICTABILITY: AN INDUSTRY ANALYSIS

Karen Nunez
Elon University
ABSTRACT
This study investigates the ability of Free Cash Flow to predict performance in capital
intensive and non-capital intensive industries. This study provides empirical evidence on Free
Cash Flow versus traditional performance indicators and indicates whether Free Cash Flow
better summarizes firm performance as reflected in stock returns/prices. This study makes three
contributions. First, Free Cash Flow, considered by some as a refinement of cash flow and a
more contemporary measure is used. Second, the predictability of Free Cash Flow is compared to
traditional measures of performance. Third, this study extends the research on industry
comparisons by using industry-specific analyses to examine the predictability of Free Cash Flow.
Results indicate that Free Cash Flow is significantly different from Operating Cash Flow and Net
Income, but there are mixed results on differences in the relative explanatory power in capital
intensive and non-capital intensive industries.