Effect of Corporate Governance on Free Cash Flow via Dividend Payout

ABSTRACT This study aims to investigate the effect of corporate governance mechanisms (i.e., board composition, insider ownership, block holder ownership, and audit quality) on free cash flow (FCF) through the dividend policy of the firms listed on the Pakistan Stock Exchange (PSX). The sample of non-financial firms was taken from the KSE-100 index from 2008 to 2017. The mediation technique developed in 1986 by Baron and Kenny is used. The results revealed that CG mechanisms help to minimize the agency problem of free cash flow. Strong governance attributes results in higher dividend payment. This study concludes that a high dividend payout has a negative effect on FCF. Overall, this study confirms the full mediating effects of dividend payout on the relationship between board independence and FCF, insider ownership and FCF, audit quality and FCF, and partial mediation of dividend payout on the link between board meetings and FCF. The results suggest that firms should build and execute their policies relating to corporate governance to manage their resources efficiently; this can help reduce FCF and minimize agency problems.