On free cash flow hypothesis and firm’s operating performance after seasoned equity offering

Authors: Kehluh Wang, S.W. Huang, Jian-Wei Chen

Journal: Chiao Da Management Review. Jun. 2006, 26(1): 1-14.

Keywords: Seasoned equity issue; Operating performance; Free cash flow hypothesis

Abstract:
The purpose of this study is to explore the effect on long term operating performance from seasoned equity offering (SEO), and to test the validity of the free cash flow hypothesis. Using the pairwise T-test and the regression analysis, we find that: (1) the operating performance is declining significantly from one to three years after SEO by 1.37%, 2.23% and 2.75% respectively; (2) the declines in operating performance are highly related with the free cash flow before the SEO. The conclusions of this paper strongly support Jensen’s Free Cash Flow hypothesis. In Taiwan, the long term performance of SEO can be explained by the free cash flow hypothesis.