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



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Jan 7th, 3:15 PM Jan 7th, 4:00 PM

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.