Free cash flow problem and stock return synchronicity in the Belgian market

Abstract

Firm-specific return variation has earned a remarkable recognition as a measure of stock return informativeness since the Morck et al. (2000) seminal paper. We inspect whether Jensen’s Free Cash Flow problem increases the stock return synchronicity in the Belgian market. We expect that low-growth firms with high free cash flow have higher stock return synchronicity. In addition to that, managers of firms with high undistributed free cash flow tend to manage their earnings and lower disclosure quality. Our empirical tests support the hypothesis that free cash flow problem is an important driver in increasing stock return synchronicity and lowering disclosure quality.