The moderating role of agency costs on the impact of free cash flow on firm performance: Evidence from the Philippines

Date of Publication


Document Type

Master's Thesis

Degree Name

Master of Science in Accountancy


Ramon V. Del Rosario College of Business



Thesis Adviser

Aeson Luiz Dela Cruz

Defense Panel Member

Brian C. Gozun


The argument of Jensen and Meckling (1976) about the self-interest motive of managers that could potentially destroy shareholders wealth has opened doors for researches relating to agency theory. The free cash flow hypothesis proposed by Jensen extended the knowledge about the opportunistic behavior of the agents and how could it possibly affect firm performance. This research deals with free cash flow (FCF), its impact of FCF when interacted with agency costs measures and the moderating effects of agency costs on the impact of FCF on firm performance. The study aims to address problems in four fronts. First, this study tries to establish the influence of FCF alone on firm performance. Second, this study investigates the impact of the interaction of FCF and agency costs measures on firm performance. Third, this research attempts to examine the moderating effects of agency costs on the impact of FCF on firm performance. Last, it tries to provide credence on the free cash flow hypothesis and agency theory in the Philippine setting.

It examined 102 publicly listed companies in the Philippines for a five-year period, 2012-2016. The agency costs measures are asset turnover (AssetT), selling, general, and administrative expense ratio (SGAExR), advertising and research and development ratio (ARDR), net operating income volatility (NOIVol), and net income volatility (NIVol). Financial performance is proxied by return on assets (ROA), return on equity (ROE), and share return (SRet). All financial data were gathered from the PSE Edge website.

Three main points were drawn from this study. First, without the moderation of agency costs, FCF does not significantly influence the operating and market-based performance of a firm. Second, when agency cost measures interact with FCF, the impact of FCF with firm performance becomes more pronounced. In other words, FCF alone does not influence operating performance of a firm, however, if the firm exhibits high AssetT and low NOIVol, FCF displays a positively significant influence on operating performance of a firm (ROA and ROE). Although this is an expected result considering the relationship of agency costs and free cash flow, the outcome does not provide credence on the free cash flow hypothesis and echoes the result of other researches that shows that excessive amount of cash flow is positively related to increase in operating performance. Third, agency costs improve the impact of FCF on the operating performance of the firm. AssetT and NOIVol could be the better measures of agency costs.

Results of this research call for further studies to address some limitations. Future research may consider including proxy additional variables for agency costs and firm performance measures. Samples can also be expanded to include financial institutions and holding firms. The mediating role of agency costs on free cash flow can also be explored using simultaneous equation model (SEM).

Abstract Format






Accession Number


Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

ix, 83 pages ; 30 cm. ; 1 computer optical disc ; 4 3/4 in.


Cash flow--Philippines; Cash management--Philippines; Corporations--Finance; Business enterprises--Finance

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