*Corresponding author. E-mail addresses: dr.ghodrati42@google.com (H. Ghodrai) © 2014 Growing Science Ltd. All rights reserved. doi: 10.5267/j.msl.2014.8.021 Management Science Letters 4 (2014) 2001–2010 Contents lists available at GrowingScience Management Science Letters homepage: www.GrowingScience.com/msl A study on relationship among free cash flow, firm value and investors’ cautiousness: Evidence from Tehran Stock Exchange Hassan Ghodrati a* and Abbas Hashemi Department of Management and accounting, Kashan Branch, Islamic Azad University , Tehran, Iran C H R O N I C L E A B S T R A C T Article history: Received January 20, 2014 Accepted 5 July 2014 Available online August 18 2014 Financial statements as well as financial standards are always considered as primary sources for getting rich information of firms. The standards are normally divided in two categories of economic and accounting and each of these standards shows one of the specifications of the company and has its own advantageous and disadvantageous. There are different standards, which are used for firm assessment. Therefore, a company with more gained prominences has more change to succeed in attracting credits and financing from the capital market. Under such circumstances, such a company can attract more finance and it can be sold sooner on the stock exchange. This paper tries to investigate on the free cash flow as an effective factor in specifying the real value of the business enterprises on 56 selected firms from Tehran Stock Exchange. The results of this study have disclosed that, there was a direct and meaningful relationship between free cash flow of the business enterprises and their real values. Second, the real values of the business enterprises are more than their predicted values. Finally, the predicted value of the business enterprises on the basis of the free cash flow is more than their market value. © 2014 Growing Science Ltd. All rights reserved. Free Cash Flow Real Firm Value Predicted Firm Value Capital Cost 1. Introduction Free cash flow is a metric to measure the performance of most firms and represents the cash that the company would have after paying expenses necessary to maintain and to develop assets. Therefore, free cash flow is very important because it allows firms to seek opportunities to increase share value. Having no cash will make many measures impossible including new product development, having business achievement, paying cash benefits to shareholders and debt relief. On the other hand, cash should be kept at a level appropriate to balance cash costs and insufficient cash costs. Given the findings, the capital market is a very high discount rate, which neutralizes future profits in calculating the value of enterprise. Namely, future cash flows discounted rate is so high that most of future cash flows are disregarded practically. This is in conflict with what many claim as “A firm value equals a current discounted value of future cash flows” (Platt, et al., 2010). In this study, we seek to investigate this claim as to whether or not companies have more value than what the market believes.