Study On The Sugar Industry Of Pakistan Finance Essay
1.1 Overview of the Sugar Industry of Pakistan
Pakistan is the 5th largest country in the world in terms of area under sugarcane cultivation, 11th by production and 60th in terms of yield. Sugarcane is the primary raw material for the production of sugar. Since independence, the area under cultivation has increased more rapidly than any other major crop at around one million hectares. The sugar industry in Pakistan is the 2nd largest agro based industry comprising 81 sugar mills out of which 27 are listed on Karachi Stock Exchange. The annual crushing capacity of the industry is over 6.1 million tones. Sugarcane farming and sugar manufacturing contribute significantly to the national exchequer in the form of various taxes and levies. Sugar manufacturing and its by-products have contributed significantly towards the foreign exchange resources through import substitution. Sugar production is a seasonal activity. The mills, at an average operate for 150 days a year whereas the supplies are made throughout the year. As the industry now has large daily crushing capacity there are efforts to reduce the production even further.
1.2 About the subject
The purpose of this research was to examine the significance of free cash flow in relation with firm’s capital expenditure. Many researchers have studied the relationship built around free cash flow and have argued that managers have to play a vital role in deciding where free cash flow eventually ends up. Something known as an agency problem is widely discussed and commented on by several researchers. This problem talks exactly about the conflict of interest between managers and shareholders. Shareholders are interested in earning as much dividends as possible which would increase their value. On the contrary, managers think for themselves. They tend to invest the available cash flow in projects that would not necessarily increase shareholder’s value but ensure that the tenure of the manager is as extended as possible. New investments would mean more responsibilities on managers thus their uninterrupted length of service is required in the long term interest of the firm. Going one step ahead of agency problem, this study is related to free cash flow which shows an association and a relationship with the capital expenditure.
1.2.1 Free cash flow. Free cash flow is a measure of financial performance and one of the sources of capital expenditure in firms. Managers can either disburse the available cash among shareholders in the form of dividends after keeping aside the money required to expand or maintain its asset base or hold it back for developing new products, making acquisitions, and reducing debt.
At this point in time, it is imperative to note that negative free cash flow in itself is not bad. If free cash flow is negative, it could show that a company is developing new products, reducing debts or even making large investments. If these cash out flows earn a high return eventually, the strategy has the potential to pay off in the long run.
1.2.2 Capital expenditure. Capital expenditure (CAPEX) are those cash outflows that create future benefits for the firm. A capital expenditure is incurred when a business outlay funds to acquire or upgrade physical assets such as property, industrial buildings or equipment. CAPEX is commonly found on the Cash Flow Statement as an investment in plant, property and equipment or something similar in the investing section. Companies listed on stock exchange will often list their capital expenditures for the year in annual reports, which allows shareholders to see how the company is using their funds and whether it is investing in its long term growth.
The hypothesis tested in this study is accepted and thus a non existence of a relationship between free cash flow and capital expenditure is established.
Free Cash flow has no relationship with capital expenditure.
1.4 Theoretical framework and hypothesis formation
The hypothesis aims to prove that there is no relationship between free cash flow and capital expenditure, concentrating on the Sugar Industry of Pakistan. In order to do that, linear regression seems to be the best test as it attempts to model the relationship between two variables by fitting a linear equation to observed data. One variable is considered to be an independent variable while the other is considered to be a dependent variable. The objective of multiple linear regression analysis is to use the independent variables whose values are known to forecast the single dependent value selected by the researcher. (Hair, 2006)
Cash flow was determined by integrating the cash receipt and disbursement items from the income statement with the change in each balance sheet item; the sum of the cash inflows equals the sum of the cash outflows. Whereas capital expenditure is the amount a company spends buying or upgrading fixed assets, such as equipment, during the year and acquiring subsidiaries, minus government grants received.
Jensen (1986) in his free cash flow (FCF) hypothesis suggests that surplus cash flow was exhausted on value-destroying expenditure because managers have personal motivation to raise the asset base of the business rather than dispense cash among shareholders in the form of dividends.
Cash flow has always been somewhat of a puzzle in the literature on the determinants of investment. Gugler (2004) argues that in a strictly neoclassical world, cash flow does not belong in an investment equation. Even than pragmatic studies dating back over 4 decades invariably document that cash flow and investment are positively related.
The effect of cash flow engendered from within on financing of capital investment expenditure is well studied. But what remains to be studied thoroughly is the reason behind this effect. The irrelevance proposition of Modigliani and Miller (1958) affirms that firms undertake positive net present value (NPV) ventures irrespective of the source of financing.
Firms that pay low dividends rely more profoundly on cash flow as shown by Fazzari, Petersen and Hubbard (1988). The first two gentlemen also found that such firms use working capital adjustments and not external financing to maintain the needed capital expenditure in order to smooth fluctuations in cash flow. They further argued that in order to save cash flow, firms choose a stumpy dividend payout strategy.
Calomiris and Hubbard (1995) proved that those firms have most reliance on cash flow to finance capital expenditure which pay the highest taxes allied with undistributed profits.
Devereux and Schiantareelli (1990) found that as compared to smaller firms in the UK, the large firms depend more heavily on cash flow financing. The reason they pointed out for such a trend was the manager/shareholder agency problems in these large firms mainly because of lower managerial ownership and higher costs allied with monitoring system.
In this thesis, further evidence have been provided on the role of free cash flow and capital expenditure through observing the data provided by the Karachi Stock Exchange. To measure the market reaction to such expenditure plans, the over and above returns around capital announcements have been used. It was moreover, found that the impact capital expenditure has on firm value that is financed by cash flow depends upon the characteristics of the firm making the expenditures. Firms show a strong positive relation between the level of undistributed cash flow and the level of announced expenditure, although large firms depend less heavily on cash flow as compared to the small firms and those firms that have high managerial ownership.
Jensen (1986) proposed that those firms which had a hefty level of free cash flow were likely to squander it on unprofitable ventures. As a result undistributed cash flow must play an important role in illumination of capital expenditure by these organizations. In addition, there are firms which are more prone to the free cash flow agency problems, especially the large firms which, as discussed by Devereux and Schiantarelli (1990), generally have a more assorted ownership formation. Jensen (1993) discussed such firms as the ones that have further expensive internal control system. About small firms, Jalilvand and Harris (1986) commented that they are more vulnerable to experience cash flow restraint mainly because they have limited way in to outer captial market due to high transaction cost of public security isssue and the information problems. Therefore, Vogt (1997) believes that small firms tend to have profitable and at the same time unexploited investment opportunities. The available cash flow should be the main source of capital expenditure by these firms. Moreover, if cash flow is used by these firms to fund the capital expenditure, such an announcement must show a positive reaction in terms of appreciated stock prices.
Jensen (1986) argues that there are agency costs coupled with free cash flow. His study broadens that argument and speculates that shareholders form their valuation decisions on firms' reputations regarding free cash flow exploitation. This notion was tested by examining the stock price responses to equity offers, which generally aggravate the cash flow quandary, for firms differentiated by their recent avaricious behavior. The results suggested that shareholders react more positively to equity issue announcements if firms have obtained only assets related to their key business than to other equity issue announcements.
On another occasion, Jensen and Meckling (1976) explained the agency problem between managers and shareholders. They unarguably stated that managers are supposed to be the representatives of the shareholders. But they tend to make those decisions that will maximize their own benefits as opposed to the shareholder’s value. In order to restrict them from doing so, they must either be provided incentives or be monitored. They further argued that in firms where managers have low level of insider ownership, have greater enticement to invest in unbeneficial projects that elongate the firms beyond its most favorable size and the expected yield on new capital expenditure would be negative for such firms. Such actions would obviously be inconsistent with firm’s value maximization objective.
Jensen (1986) suggests that stock prices are tendered downward to imply agency costs coupled with a firm's free cash flow. In particular, managers have an enticement to use unfettered funds to benefit themselves instead of the shareholders. John and Nachman (1985) claim that agency costs can be alleviated through reputation building. Particularly, they demonstrate that the agency problem of underinvestment can be determined through reputation. The observed results recommend that managers build reputation through covetous activity whereas the shareholders state their response on pre-acquisition activity. In an ideal world, managers would disburse the entire free cash flow among the shareholders provided; the interests of shareholders and managers complement each other. This would maximize shareholders’ wealth and allow them to use the available cash for capitalization. Amihud and Lev (1981) however argued that managers have an enticement to minimize their employment risk. Employment risk aims to explain the insecurity inbuilt in a manager's tenure or the term of employment. Managers have an option of increasing the certainty of their tenure by diversifying the real asset portfolio of the firm and they do it by purchasing those assets that are unrelated to the primary line of business of the firm. Managers have an option of financing diversification projects by using the free cash flow that has been held back and not been distributed to shareholders, thus they need not seek funds from the capital markets.
Easterbrook (1984) believes that it is easy to watch the managerial behavior of the firms when they seek funds from the well-performing capital markets. Therefore, on one hand it becomes difficult to keep a check on the performance of managers if they use the hoarded cash flow for the purpose while on the other hand, investors are unable to measure free cash flow as they are incapable of scrutinizing the investment opportunity schedule of the firm. Shareholders are expected to take any unencumbered cash request negatively, coming from the management for the purpose of diversifying. Unless they are provided sufficient proof, they will assume the request to be the acquisition of free cash flow. As a result of this ambiguity, stock prices will fall and show the residual loss caused by the probable misuse of free cash flow by management. Further, managers may wish to expand firm size, irrespective of the fact that it increases shareholders wealth or not, based on the assumption that executive promotion and compensation are positively related to firm size (Donaldson 1984; Baker 1986; and Baker, Jensen, and Murphy 1988).
Cash flow is related to the expected yield from new venture as shown by Myers and Majluf (1984). Those firms which have a shortage of liquid assets and cash flow might let go profitable investment expenditure instead of issuing mispriced securities to finance the investment. As a result, these firms might have unexploited investment opportunities which would increase organization’s value if adequate cash flow is generated to finance them.
Capital expenditure of high ownership businesses must show a reliance on cash flow and positive surplus profits must be there for these firms when they declare new capital expenditure. Morck, Shleifer, and Vishny (1988) described greater levels of insider ownership to be linked with greater levels of capital expenditure financed by cash flow due to managerial establishment issues. Firms with greater insider ownership might wish to finance expenditure with cash flow exclusively to avoid control loss associated with weakening their ownership status or limitations imposed by the creditors.
Lehn and Poulsen (1989) and McLaughlin, Safieddine, and Vasudevan (1996) defined Free Cash Flow to be operating income before depreciation, less interest expense on debt, less income taxes, less preferred and common dividends.
Vogt (1997) calculated both cash flow measures net of dividends and interest expense to control for decisions made at managerial level which affect the level of non dispensed cash flow. A prejudice would be created in the studied relation between cash flow, market returns and capital expenditure if the other decision variables are ignored. As an example he referred to a firm which although has greater levels of cash flow but does not maneuver the agency problem. Such a firm would lessen non dispensed cash flow by opting for high dividend and/or interest levels. It might practice profitable investment expenditure and is not likely to depend heavily on cash flow for the financing. This firm must be allied with optimistic market responses about expenditure announcements.
Vogt (1997) used 421 firms to observe relationship between cash flow and capital expenditure. When these firms announced expenditure increases, the level of declared capital expenditure seemed to be positively and much strongly associated with the cash flow level. The vigor of this relation amplifies for businesses with profitable earlier investment opportunities, while firm size drops, and as the fraction of insider possession increases.
His further analysis suggested that considerable diversity prevails in the capital market's retort to capital expenditure financed by cash flow. The statistically significant as well as positive excess profits found in the sample of businesses announcing increases is strenuous in the smallest of the sample businesses, in businesses with low cash flow compared with capital expenditure and, to a smaller extent, in businesses with high levels of the insider share ownership. There are tests that explain the cross-sectional deviation in returns expose that excess profits for small and medium businesses in the model are positively related with unexpected raise in planned expenditure. These tests are also suggesting that the funds market responds more positively to the announced expenditure by small businesses when the planned expenditure is more reliant on cash flow. On the other hand, excess profits for the largest businesses in the model are negative, however statistically insignificant.
Vogt (1997) observed that due to the fact that small businesses and high ownership businesses are most likely to handle the liquidity crunch linked with the asymmetric information, they are most likely to let go lucrative investment opportunities in times of cash flow scarcity. As cash flow increases, the money-making capital investment ventures the firm can carry out also increases. As a result, capital expenditure announcements are met with optimistic shareholder response, particularly when expenditure is cash flow dependent.
Vogt (1997) concluded by observing that the apparent diversity in the response of market to capital expenditure decisions propose different capital expenditure financing policies for businesses that seek to augment shareholder value. The market values of small businesses, businesses with significant insider ownership, and businesses that are generally cash flow confined appear to be improved by financing capital expenditure with cash flow. These businesses may consider policies of saving undistributed cash flow through leverage and low disbursement policies. Such an action therefore encourages new capital expenditure from internally generated funds. However, all other businesses seem to be less reliant on a cash flow retention policy to assist capital expenditure.
In 1986 while explaining the free cash flow (FCF) hypothesis Jensen (1986), concentrates on the agency problem. He believes that managers can enhance their possessions at the cost of shareholders by not paying out the funds from a firm's free cash flow in the form of debt financed stock repurchases or dividends, rather investing them in unprofitable investment prospects. Devereux and Schiantarelli (1990), Strong and Meyer (1990), Oliner and Rudebusch (1992) and Carpenter (1993) later studied the role that agency issues play in the relationship between cash flow and investment. Their results turned out to be conflicting vis-a-vis the significance of free cash flow. Strong and Meyer (1990) found that share prices of firms that undertake investment expenditure with unrestricted cash flow face negative performance while Oliner and Rudebusch (1992) found little evidence regarding ownership structure affecting the relationship between cash flow and investment.
The firm's decision regarding dividend has connotation for the FCF theory. According to Lang and Litzenberger (1989), dividends are one way of eradicating free cash flow. Vogt (1994) developed a model in this research paper where he showed that businesses with the chance to exploit free cash flow will go after low dividend payout policies and cash flow would have a strong control on investment expenditure. On the other hand, if firms are confined from obtaining external funds because of whatever reason, firms with profitable venture opportunities would sustain low dividend payout policies with the intention of preserving on cash flow. Therefore his model was found to be steady with Fazzari, Hubbard, and Petersen (1988); it envisages that low payout firms must be linked with a strong relationship between cash flow and investment.
There has been considerable pragmatic evidence which indicate that internally created funds are the focal way of financing firm’s investment expenditures. Gordon Donaldson (1961), in a detailed study of 25 large firms, concludes as follows: "Management strongly favored internal generation as a source of new funds even to the exclusion of external funds except for occasional unavoidable 'bulges' in the need for new funds."
A later survey of 176 corporate managers by Pinegar and Wilbricht (1989) discovers that managers favor cash flow to finance new investment over external sources as 84.3% of model respondents showed their preference for funding investment with cash flow.
Vogt (1994) explains the relationship of cash flow and capital expenditure by analyzing the free cash flow theory of Jensen (1986). As monitoring is assumed costly, and managers can benefit from overinvestment, he predicts that cash flow will significantly influence investment expenditure after controlling for the cost of capital. Investment expenditure of firms not paying dividend would be more influenced by cash flow than investment expenditure of firms that pay dividends. This follows because no-dividend firms are able to retain all cash flow and still not reach the retention constraint. Businesses that are liquidity-constrained, cash flow and adjustments in their stock of the liquid assets must have a considerable impact on investment expenditure. Businesses with large information asymmetries or several profitable investment opportunities would be having investment expenditure that is most responsive to changes in cash flow, and must preserve on cash flow by paying no or low dividends. Firms signifying a liquidity restraint by not paying out dividends would have the most noteworthy cash flow and investment relationship.
In a study; Fazzari, Hubbard, and Petersen (1988) discovered that cash flow has a sturdy effect on investment expenditure in businesses that have low dividend payout policies. They argued that such a result is unswerving with the belief that because of asymmetric information costs associated with external financing, low payout firms are cash flow confined. One reason why these businesses keep dividends to the lowest is to preserve on cash flow from which they can fund profitable investment prospects. Later in the year 1993, Fazzari and Petersen (1993) found that the same group of businesses paying low dividends, even out fluctuations in cash flow with working capital to sustain preferred investment levels. This result is unswerving with the findings done by Myers and Majluf (1984) which states that the underinvestment crisis occurring due to asymmetric information can be alleviated by the liquid financial assets.
Carpenter (1993) studied the relationships between debt structure, debt financing, and investment expenditure to test the theory of free cash flow, comparing the restructured firms with the non-restructured firms. He observed that firms had increased their investment expenditure that was restructured by substituting large amounts of external equity with debt as compared to non-restructured firms. To him these results seemed to be inconsistent with free cash flow performance. He believed that cash flow which is committed to debt maintenance must be correlated with reductions in later investment expenditure.
Devereux and Schiantarelli (1990) and Strong and Meyer (1990) conducted studies that support the free cash flow elucidation. Strong and Meyer (1990) studied separately the investment and cash flow of firms in the paper industry into sustaining investment and optional investment, and total cash flow and remaining cash flow. Optional investment and share price performance is strongly yet negatively correlated. Discretionary investment and residual cash flow are found to be strongly and positively related. This proof suggests that enduring cash flow is frequently used to finance unprofitable discretionary investment expenditure.
Study conducted by Vogt (1994) related to cash flow and capital expenditure predicts that businesses which do not pay dividends must show the strongest association, whereas those businesses that do pay high dividends must exhibit the weakest relationship between cash flow and investment expenditure. His result suggested that cash flow-financed capital expenditure is slightly inefficient and provides facts in support of the Free Cash Flow hypothesis. Regarding the small businesses paying low dividends over the sample period, Vogt (1994) commented that such businesses relied profoundly on cash flow and changes in cash to finance capital expenditure. Cash flow-financed growth by small, low-dividend firms is likely to be value- creating, whereas cash flow-financed growth is value destroying for large, low-dividend firms. He concluded by suggesting that managers of cash flow-rich companies can even decide to increase dividend payouts in order to increase the efficiency of their capital expenditure decisions. A persistent high-dividend-payout policy can also give a hint to shareholders that extra and expensive monitoring of capital expenditure decisions is not required. Furthermore, as capital expenditures just add to the amount of assets which is under managerial control and create more predictable future cash flows, these expenditures create the opportunity to utilize free cash flow in following periods.
Alti (2003) found out that investment is sensitive to cash flow. The sensitivity is substantially higher for young, small firms with high growth rates and low dividend payout ratios. The uncertainty these firms face about their growth prospects amplifies the investment-cash flow sensitivity in two ways. First, the uncertainty is resolved in time as cash flow realizations provide new information about investment opportunities. This makes investment highly sensitive to cash flow surprises. Second, the uncertainty creates implicit growth options relate to long-term growth potential but not to investment in the near-term. Having a weaker relationship with the value of long-term growth options, cash flow acts as a useful instrument in investment regressions.
Gentry (1990) analyzed capital expenditure with total cash flow and found out that the percentage of cash flows going to capital investment ranged from an outflow of 60 percent or more. The giant companies invested a higher percentage of their total outflow in plant and equipment than companies in the other size categories. The small companies invested the lowest percentage of their total outflows in capital.
There has been a research done previously that was applied to agricultural firms by Jensen (1993). The results were found to be consistent with previous studies for nonagricultural firms which showed that internal cash flow variables are important in explaining investment. It was found that the addition of internal cash flow variables can improve the explanatory power of agricultural investment models. In terms of elasticity, investment was more responsive to internal cash flow variables.
Worthington (1995) has found that cash flow measures industry-level investment equations positively and significantly, even after investment opportunities are proxied by capacity utilization variables. The effect of cash flow is greater in durable goods industries than in non durable goods industries.
Moyen (2004) explained the fact that the cash flow sensitivity of firms described by the constrained model is lower than the cash flow sensitivity of firms described by the unconstrained model can be easily explained. In both models, cash flow is highly correlated with investment opportunities. With more favorable opportunities, both constrained and unconstrained firms invest more.
Raj Aggarwal (2005) conducted a study in which he concluded that investment levels are significantly positively influenced by levels of internal cash flows. Also, the strength of this relationship generally increases with the degree of financial constraints faced by firms. Overall, these findings seem strong to the nature of the financial system and indicate that most firms operate in financially incomplete and imperfect markets and find external finance to be less attractive than internal finance.
3.1 Sampling design
Sample companies that are taken for the purpose of research are 27 sugar mills of Pakistan that are listed on Karachi Stock Exchange.
3.2 Data Collection
Annual financial statement data for 27 sugar mills of Pakistan listed on KSE is taken to calculate free cash flow and annual capital expenditure for the period 2000 through 2008.
3.3 Model Specifications
1. Independent variable = Free Cash Flow (FCF)
2. Dependent variable = Net Capital Expenditure
188.8.131.52 Independent variable. The FCF is calculated the way Lehn and Poulsen (1989) and McLaughlin, Safieddine, and Vasudevan (1996) defined it. It is operating income before depreciation, less interest expense on debt, less income taxes, less preferred and common dividends.
Free cash flow = Operating income before depreciation – interest on debt – income taxes – preference & common stock dividend.
184.108.40.206 Dependent variable. Net capital expenditures are those where funds are used to acquire or upgrade physical assets such as property, industrial buildings or equipment. Change in fixed assets over a year is taken as net capital expenditure by the firm.
Net capital expenditure = Current year fixed assets – last year fixed assets.
Net capital expenditure = Ln (FA)
Ln of fixed assets is taken to control the variability of the data.
3.4 Data analysis
PP plot of Fixed Assets (FA)
PP plot of the first difference of Fixed Assets (FA)
PP plot of the Natural Log of Fixed Assets (Ln_FA)
PP plot of Free Cash Flow (FCF)
3.5 Interpretation of data analysis
The PP plot of Fixed Assets (FA) is not fulfilling the requirement of the data being normally distributed. The values are deviating too much from the benchmark line.
In the second graph, the PP plot of the first difference of Fixed Asset is not normally distributed either.
In the third graph, the PP plot of the Natural Log of Fixed Assets is normally distributed to a great extent as the values are very close to the benchmark line. Therefore, the data of Natural Log of Fixed Assets is used for further analysis.
In the fourth graph, the data of FCF is also normally distributed. Thus, fulfills the prerequisite.
Free Cash flow has no relationship with capital expenditure.
The correlation between Ln FA and FCF is 0.011 which is very weak and insignificant as the p-value is 0.433 which is not less than 0.05 (the benchmark). This depicts that there is no interdependence between FCF and Ln FA.
Adjusted R Square
Std. Error of the Estimate
Predictors: (Constant), FCF
The researcher has used statistical software SPSS 17.0 to process the data and run regression analysis on the variables. The results are interpreted in light of statistical text book by Hair (2006).
All FCF and (ln) FA figures are in Million Rupees.
R squared value: the coefficient of determination, R2 is the amount of variance in the dependent variable that can be explained by the regression model. It is the goodness of fit and shows the explanatory power of a model.
Here, it is almost 0 (zero) which depicts that changes in Free Cash Flow do not bring any change in Fixed Assets.
In Pakistan, particularly in the Sugar Industry, expansions do not take place every year. Therefore, firms that have spare cash flow do not necessarily invest it in buying fixed assets.
a. Dependent Variable: Ln_FA
The slope of the function is very small and highly insignificant as p-value (0.866) is not less than 0.05 (benchmark). It indicates that change in Free Cash Flows do not cause a change in Fixed Assets.
DISCUSSIONS, IMPLICATIONS, CONCLUSION
As discussed through out, the importance of Free Cash Flow and Capital Expenditure is quite significant in various industries around the world. After conducting the same study in the Sugar Industry of Pakistan it became apparent that these two variables have no relation between them.
Reiterating the earlier discussion, free cash flow can be put to several uses; capital expenditure could be one of them. However, the study proved that free cash flow is not used for capital expenditure in this industry, rather disbursed as dividends among sharehoders or held back as retained earning. The nature of the industry is as such that expansion does not take place every year, therefore the need to invest in fixed assets does not arise.
Researchers in Pakistan will be able to use this study for their own analysis and to figure out the reasons why this industry is inconsistent with other industries of the world. Whereas the foreign researchers will be able to take help from this study while they study and compare their own economy with that of Pakistan. It will help them benchmark the 5th largest country in the world, in terms of area under sugarcane cultivation; to compare and contrast with the country they wish to study.
The sugar industry in Pakistan is the 2nd largest agro based industry of the country. Pakistan earns heavy foreign exchange resources through import substitution of sugar. Despite of the importance of this industry, significant attention is not paid at the government level to develop it. Lack of support at educational institution level for research and development in this industry is sabotaging the prospects of its better future. Among several other reasons, this research has been done to mark a contribution towards sugar industry, cultivating a field for other researchers to come forward and take the study steps ahead.
The relation that exists between free cash flow and capital expenditure is observed in this study. The conclusion verifies that this industry is not consistent with several other industries all over the world in terms of using free cash flow for capital expenditures. Instead of expanding the size of the firms and investing in the fixed assets, management rather distributes the free cash flow among shareholders. On one hand it increases shareholders value but on the other hand it does not contribute towards improved GDP and a potential increase in output is lost by not making the capital expenditure.
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