The effect of firm financial performance, free cash flow and cash holding on overinvestment

Abstract

PURPOSE: This study examines the impact of firm financial performance, free cash flow, and cash holding on the overinvestment of manufacturing companies listed on the Indonesia Stock Exchange in 2017-2021.

METHODOLOGY: We employed 315 manufacturing companies listed on the Indonesia Stock Exchange for the 2017-2021 period as samples. The data required is correlated to financial performance, free cash flow, cash holding, and company overinvestment. Data is input manually from the financial reports obtained from the website of each firm. To examine the hypothesis, this study applied multiple regression analysis methods.

FINDINGS: The results show that free cash flow has a significant and negative effect on overinvestment. It illustrates that higher free cash flow does not encourage a manager to overinvestment. This result support hypothesis 1 (H1). Cash holding affects overinvestment positively and significantly. These results indicate that higher cash holdings inspire managers to overinvestment. These results support hypothesis 2 (H2). Firm performance influences overinvestment negatively and significantly. This result indicates that higher firm performance does not motivate a manager to overinvestment. These results support hypothesis 3 (H3).

ORIGINALITY/VALUE: Difference from the previous study, this study examines the impact of financial performance, free cash flow, and cash holding on overinvestment in one comprehensive model.