On the Definition, Measurement, and Use of the Free Cash Flow Concept in Financial Reporting and Analysis: A Review and Recommendations

Abstract

The concept of free cash flow was first proposed by Jensen (1986) in the context of the agency problem; however he did not propose a specific calculation for free cash flow. Since then free cash flow has become a popular metric for academic researchers and financial statement users, but there is much variation in how free cash flow is being calculated. We highlight the variety of ways that free cash flow is calculated, discuss the problems associated with having such a wide variation, and make recommendations to address the issue.