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Type of Submission

Refereed Article

Abstract

The results presented in this paper show that integrative financial and operating measures of liquidity provide investors and creditors with additional information beyond that provided by static measures of short-term liquidity such as the current and quick ratios. Analyzing a sample of restaurant firms over the period 1994-2003, our analysis of these dynamic measures of liquidity provide a drastically different view of short-term solvency than those produced from the static measures. Specifically, the static measures of liquidity imply that restaurant companies are not liquid However, restaurant companies, when evaluated under this integrative framework, were shown to be more liquid based on their financial and operating liquidity than their current and quick ratios implied. Thus, financial analysts, creditors and managers should evaluate both dynamic liquidity measures as well as static measures in their evaluation of the risk associated with covering their short-term obligations when evaluating the short-term financial liquidity and short-term credit worthiness of firms. In addition, careful attention should be paid to both financial and operating measures of liquidity to establish what changes, if any, have occurred in a company’s liquidity position over time. This is an important finding for managers and investors in all industries since short-term illiquidity implies a high risk of default if the banks refuse to refinance all or part of the debt. This in turn may impact the cost of short-term financing and may result in an impact on their overall financing costs and required returns from equity investors.

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