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JOURNAL OF ACCOUNTING AND FINANCE

Which Free Cash Flow Is Value Relevant? The Case of the Healthcare Industry

Author(s): Mostafa M. Maksy

Citation: Mostafa M. Maksy, (2013) "Which Free Cash Flow Is Value Relevant? The Case of the Healthcare Industry," Journal of Accounting and Finance, Vol. 13, Iss. 6, pp. 107 - 117

Article Type: Research paper

Publisher: North American Business Press

Abstract:

The definition of free cash flow (FCF) varies widely in accounting theory and practice. The objective of

this study is to empirically identify which definition is the most value relevant for the healthcare industry.

Using a sample of 14,866 observations from 1988 to 2010, the author shows that the FCF defined as cash

flow from operations less capital expenditures is the one most associated with stock prices. The author

recommends that the FASB require healthcare companies to disclose that FCF, or at least require

companies voluntarily disclosing FCF to use that definition. This should help retail investors make better

decisions.