The Relation of Free Cash Flow and Real Earnings Management

• Main Authors: Wan-Ju Hsu, 許椀茹
• Other Authors: Yuan-Bau Chen
• Format: Others
• Language: zh-TW
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/45927835938675058435

碩士 === 東吳大學 === 會計學系 === 101 === In the 1986, the American scholar named Michael C. Jensen proposed the free cash flow hypothesis, discussing the agency cost of the free cash flow. Due to the development and decay of petroleum industry, he found out that if firms keep the free cash flow but don’t have the appropriate investment plans, then firms should return the cash to stockholders. When companies need capital after that behavior, it should raise capital on the open market. When the firms with low-growth opportunities and keep the high degree of free cash flow are more likely to invest the capital in unprofitable projects, and these kind of agency problem could lead to real earnings management for covering the manager’s inefficiency action. For another subject, based on the Sarbanes-Oxley Act, the public companies should set up the audit committee. This article wants to discuss whether if the members of the audit committee had specific license or work experienceaccord with the definition of financial expertise can improve the power of monitoring for corporate governance. This research uses the data from Compustat and the year observations over the period 2002-2011. The results show the firms have the agency problem will tend to use the abnormal cash flow from operation and abnormal discretionary costs to increase the earnings. And when the ratio of financial expertise in the audit committee getting higher, it can restrain the degree of the abnormal cash flow from operation and abnormal production costs.