Type of Submission

Refereed Article


The issuance of debt is a monitoring mechanism. Whether the debt is from a private lender or is in the form of publicly traded bonds, both types of lenders expecct a return on their money (Jensen, 1986). Thus, while finding ways to increase sales is important, the control of expenses is paramount to the success of the firm and to be able to borrow more funds in the future. Using data from 111 restaurant companies is an effective monitoring agent and if it helps firm performance. Results reveal a significant relationship between a restaurant firm's expense ratio and its short-term, long-term, and total debt ratios after controlling for firm size, economic cycles, and franchising. As such, the phenomenon of debt relevance in the restaurant sector is better understood.