Testing the relationship between free cash flow and capital expenditure in Canadian listed companies

Abstract

This paper investigates the relationship between free cash flow and capital expenditure in Canadian listed companies for the period 2010 to 2015. The sample consists of 90 listed companies in Canada drawn from 10 different industries. Firstly, this paper supports the hypothesis that there exists an autocorrelation in the relationship and therefore dynamic panel-data model should be selected. We use Arellano-Bond linear panel-data model to test which variables exhibit autocorrelations in the model. Finally, linear dynamic panel-date estimation would be used to obtain the relationship between free cash flow and capital expenditure. Through the autocorrelation and regression analysis, this paper confirms autocorrelations in free cash flow and capital expenditure. We find a negative relationship between free cash flow and capital expenditure.