Start Date
7-1-2011 3:15 PM
End Date
7-1-2011 4:00 PM
Track
2. Track 2 - Poster Session
Subject Area
Finance and Economics
Faculty Member
Kyuwan Choi (kwchoi@khu.ac.kr)
Abstract
This study investigates the relationship between internally generated cash flow and firm investment in the restaurant industry. Our focus is particularly on the difference of the investment-cash flow sensitivity between franchise and non-franchise restaurant companies.
Our particular interest in the difference of the investment-cash flow sensitivity between franchise and non-franchise restaurant companies is based on the resource scarcity theory of franchise, which is one of the two major theories explaining reasons to franchise; the other is based on agency theory. The resource scarcity theory proposes that firms franchise in order to access scarce resources, particularly capital and managerial resources, when they face difficulty raising capital through traditional financial markets, for example, through issuing stocks and bonds. Hence, we expect that franchise restaurant companies are likely to be more financially constrained than non-franchise ones, and exhibit a higher sensitivity of investment to internally generated funds.
The results of this study would be the first to highlight the relationship between internal cash flow and firm investment in the restaurant industry, and thus they should help managers of restaurant companies to understand the financing gap between franchised and non-franchised ones and to decide an efficient mix of funding sources in financing investments.
Keywords
Investment-Cash Flow Sensitivity, Internal Cash Flow, Tobin’s Q, Franchise, U.S. Restaurant, Fixed Effect Model
Corporate Investment and Cash Flow in the U.S. Restaurant Industry
This study investigates the relationship between internally generated cash flow and firm investment in the restaurant industry. Our focus is particularly on the difference of the investment-cash flow sensitivity between franchise and non-franchise restaurant companies.
Our particular interest in the difference of the investment-cash flow sensitivity between franchise and non-franchise restaurant companies is based on the resource scarcity theory of franchise, which is one of the two major theories explaining reasons to franchise; the other is based on agency theory. The resource scarcity theory proposes that firms franchise in order to access scarce resources, particularly capital and managerial resources, when they face difficulty raising capital through traditional financial markets, for example, through issuing stocks and bonds. Hence, we expect that franchise restaurant companies are likely to be more financially constrained than non-franchise ones, and exhibit a higher sensitivity of investment to internally generated funds.
The results of this study would be the first to highlight the relationship between internal cash flow and firm investment in the restaurant industry, and thus they should help managers of restaurant companies to understand the financing gap between franchised and non-franchised ones and to decide an efficient mix of funding sources in financing investments.