International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Free Cash Flow and Executive Compensation
Henri Akono

The study examines the contract-relevance of Free Cash Flow (FCF) on the premise that it captures efforts managers devote to working capital management, offers firms flexibility in project financing, and has a direct link to shareholders’ wealth creation. Although these features suggest FCF will play a role in incentive contracts, empirical evidence is limited. This paper shows that FCF is contract-relevant and its relevance varies with the sensitivity of shareholders’ value to FCF, the firm’s demand for spending flexibility, and the scope for managerial misuse of FCF. Furthermore, following the passage of the Sarbanes-Oxley Act (SOX) the contract-relevance of FCF remains positive and significant in long-term contracts, but is reduced in bonus contracts.

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