Free cash flow and its effect on the share price register

The main goal of the companies is to generate free cash flow which is generally accepted means of exchange. Yet, companies' financing methods of new investments and dividends to be distributed to the shareholders are directly affected by the free cash flow generated. It is accepted that the power to generate free cash flow is more decisive in determining the share price register of a company, rather than the profit made. Therefore, companies' power to generate free cash flow has a particular importance for investors and managers. Free cash flow is generally accepted as the net cash inflow of the company through its activities of main areas, investment and finance. Free cash flow is equal to the sum of the net cash generated from the main areas of activity (EBITDA [1 – Tax Rate] + Depreciation) and the net cash generated from investment and finance activities of the company. In order to examine the relation between free cash flow and the share price register, quarterly data set regarding the period between 2005 and 2018 of 14 cement companies whose shares are publicly traded in Borsa Istanbul are exercised in this study. In this regard, the method of panel VAR and panel causality analysis are applied. In the analysis of panel time series, firstly the stability of series is examined through panel unit root tests. In order to examine the correlation between the units, the CD test is applied and the existence of the correlation between the units is explored. Because there is a correlation between the units, it is decided to apply the second-generation panel root tests. To this end, first group Fisher ADF and third group CIPS tests are performed and it is concluded that two variables are stationary on the same plane. Therefore, panel VAR analysis is utilized to inspect the relation between the variables. Panel Granger casuality test is applied to explore the direction of the relation between two variables. As a result of this test, the casuality from the share price register to free cash flow is identified. In other words, contrary to expectations, the change in free cash flow does not determine the share price register, the share register prices which have been already priced by expectations cause the increase in the free cash of the companies.