Investment–cash flow sensitivities of restaurant firms

2018 ◽  
Vol 24 (5) ◽  
pp. 560-575 ◽  
Author(s):  
Serin Choi ◽  
Seoki Lee ◽  
Kyuwan Choi ◽  
Kyung-A Sun
Keyword(s):  
Cash Flow ◽  
Risk Sharing ◽  
Investment Decisions ◽  
Cash Flows ◽  
Resource Scarcity ◽  
Restaurant Industry ◽  
Financing Decisions ◽  
Close Relationship ◽  
Cash Flow Sensitivity

Although some theories argued that investment decisions are irrelevant to financing decisions under the assumption of perfect market, investment decisions and capital structure seem interdependent in real-world circumstances. Further, the past literature also suggested a close relationship between internal cash flows and investment decisions, that is, investment–cash flow sensitivity (ICFS), but this issue has not been closely examined in the restaurant setting. Therefore, the current study first proposes to examine ICFS in the context of the restaurant industry. More importantly, this study also examines a moderating role of franchising to better explain ICFS, considering a major role of franchising in the restaurant industry, based on theories of pecking order, resource scarcity, and risk sharing. Findings of the current study deepens the understanding of ICFS via franchising, making meaningful contributions to not only to existing ICFS literature but also restaurant franchising literature.

Do financial constraints affect the sensitivity of investment to cash flow? New evidence from franchised restaurant firms

2018 ◽  
Vol 24 (6) ◽  
pp. 645-661 ◽  
Author(s):  
Kwanglim Seo ◽  
Jungtae Soh ◽  
Amit Sharma
Keyword(s):  
Cash Flow ◽  
Specific Effect ◽  
Resource Scarcity ◽  
Restaurant Industry ◽  
Financing Decisions ◽  
The Us ◽  
Cash Flow Sensitivity ◽  
Investment And Financing ◽  
Restaurant Firms ◽  
New Evidence

This study investigates whether industry-specific characteristics such as franchising can affect investment and financing decisions when restaurant firms have limited access to capital. Building on the resource scarcity theory and investment-cash flow sensitivity (ICFS) model, this study developed an industry-specific ICFS model that analyzes corporate demand for franchising as a means of complementing the firms’ ability to invest in imperfect markets. Using a sample of US restaurant firms, we empirically evaluated the extent to which franchising provides greater insights into ICFS. By investigating the industry-specific effect of franchising on ICFS, the current study provides a more comprehensive understanding and explanation for the interaction between investment and financing decisions in the US restaurant industry. The findings of this study will provide restaurant investors and shareholders with valuable insights into how to monitor the investment behavior of management.

scholarly journals The Implications of Investment–Cash Flow Sensitivities for Franchising Firms: Theory and Evidence From the Restaurant Industry

2019 ◽  
Vol 60 (1) ◽  
pp. 77-91 ◽  
Author(s):  
Tarik Dogru ◽  
Arun Upneja
Keyword(s):  
Cash Flow ◽  
Financial Constraints ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Restaurant Industry ◽  
Cash Flow Sensitivity ◽  
Cash Flow Sensitivities ◽  
Scant Attention ◽  
Restaurant Firms ◽  
Flow Theories

Expansion through franchising could help restaurant firms solve financial constraints, but it could also make overinvestment easier for misaligned CEOs. Whereas the former topic has been extensively examined, the latter has received scant attention from researchers. The purpose of this study is to investigate whether franchising alleviates financial constraints or leads to overinvestment problems in restaurant firms. For this purpose, we analyzed and compared investment–cash flow sensitivities between constrained and unconstrained; franchising and nonfranchising; constrained, franchising and unconstrained, franchising; and constrained, nonfranchising and unconstrained, nonfranchising restaurant firms. The results show that unlike other industries, unconstrained restaurant firms depend more on cash flows for investment than constrained restaurant firms do. Although investment–cash flow sensitivity in nonfranchising restaurant firms was similar to that of firms in other industries, unconstrained restaurant firms that expand through franchising rely more on cash flows. These findings suggest that restaurant firms’ expansion through franchising is likely to increase overinvestment problems. Franchising could serve as a long-term method of financing for financially constrained firms as well as a short-term financing tool. However, unconstrained, franchising firms should distribute their excess cash flows to shareholders. Theoretical implications are discussed within the realms of the franchising, pecking order, and free cash flow theories.

scholarly journals Are companies managed by overconfident CEO financially constraint? Investment-cash flow sensitivity approach

Equilibrium ◽  
2020 ◽  
Vol 15 (1) ◽  
pp. 107-131
Author(s):  
Elżbieta Bukalska
Keyword(s):  
Cash Flow ◽  
Financial Constraints ◽  
Value Added ◽  
Cash Flows ◽  
Financial Decisions ◽  
Flow Sensitivity ◽  
Financing Decisions ◽  
Cash Flow Sensitivity ◽  
Internal Funds ◽  
The Impact

Research background: Overconfidence is one of the biases and fallacies that affect a cognitive process. Indeed, overconfidence has some serious consequences even in corporate finance. The literature is not consistent as for the impact of overconfidence on investment and financing decisions. Additionally, we include the issue of financial constraints to our analysis as investment-cash flow sensitivity (ICFS) is perceived as the measure of financial constraints. Purpose of the article: The aim of this paper is to test investment-cash flow sensitivity and financial constraints under managerial overconfidence. We think that companies managed by overconfident managers show a higher relation between cash flows and investment and demonstrate bigger financial constraints. Methods: In this paper, we test investment-cash flow sensitivity and financial constraints under CEO overconfidence among panel data of Polish private firms. We collect the unique sample of 145 non-listed companies by surveying the CEOs on their overconfidence. We collect the financial data of surveyed companies covering the 2010–2016 period. Total number of observations is 1015. Findings & Value added: First, we find a positive and higher relation between the investment-cash flow sensitivity for companies managed by overconfident managers which is in line with recent research. As for the financial constraints we find lower level of financial constraints among the companies managed by overconfident man-agers. This might be evidence that despite having lower financial constraints the companies managed by overconfident managers intentionally choose internal funds as the main source of financing and refrain from using external funds. To the best of our knowledge, this paper is the first empirical study for Polish companies on the relation between CEO overconfidence and financial decisions.

Investment decisions and the role of debt, liquid assets and cash flow: evidence from Italian panel data

1994 ◽  
Vol 4 (2) ◽  
pp. 121-132 ◽  
Author(s):  
Marzio Galeotti ◽  
Fabio Schiantarelli ◽  
Fidel Jaramillo
Keyword(s):  
Panel Data ◽  
Cash Flow ◽  
Investment Decisions

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

Corporate Sustainable Growth and the Financing of Innovation

2013 ◽  
Vol 4 (4) ◽  
pp. 43-64 ◽  
Author(s):  
Amani Kahloul ◽  
Ezzeddine Zouari
Keyword(s):  
Cash Flow ◽  
Adjustment Costs ◽  
Cash Flows ◽  
Sustainable Growth ◽  
Flow Sensitivity ◽  
Asymmetric Pattern ◽  
Cash Flow Sensitivity ◽  
Cash Flow Sensitivities ◽  
Flow Components ◽  
Transitory Component

R&D investments are a channel for growth, at the macro and micro levels. However, they are known to be characterized with high adjustment costs, therefore, it is generally admitted in the literature that firms try to smooth their R&D investments in face of shocks to internal finance, and the literature supposes that the observed investment – current cash-flow sensitivities are downward biased because R&D expenses are expected to respond to the permanent component of cash-flow but not to its transitory component. However, very few proofs, if at all, exist on the link between R&D and cash-flow components and its implications in terms of its contribution to the corporate sustainable growth. The authors decompose cash-flow into its permanent and transitory components and provide formal evidence that R&D- current cash-flow sensitivity is downward biased and that R&D- permanent cash-flow sensitivity better informs about the contribution of cash-flow to R&D smoothing, which shows a managerial commitment to sustainability. Unexpectedly, and in spite of the negligible observed sensitivities of R&D to the transitory component of cash-flow, the authors’ regressions reveal that these sensitivities have an asymmetric pattern: they are higher when cash-flow is expanding than when it is declining. This reveals a managerial preference for immediate growth, which jeopardizes sustainable growth, because of the risk of costly liquidation inherent to the reliance on the volatile transitory cash-flows.

The impact of macroeconomic condition on investment-cash flow sensitivity of Indian firms

2019 ◽  
Vol 9 (1) ◽  
pp. 19-42
Author(s):  
Gaurav Gupta ◽  
Jitendra Mahakud
Keyword(s):  
Cash Flow ◽  
Economic Condition ◽  
Investment Decisions ◽  
Group Affiliation ◽  
Content Type ◽  
Flow Sensitivity ◽  
Macroeconomic Condition ◽  
Gdp Growth Rate ◽  
Cash Flow Sensitivity ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of the macroeconomic condition on investment-cash flow sensitivity (ICFS) of Indian firms and examine whether the effect of macroeconomic condition on ICFS depends on the size and group affiliation of the firm. Design/methodology/approach An empirical investigation is conducted using a dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique. Findings Empirical findings postulate that the availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are internally as well as externally financially constrained. This study finds that good economic condition (period of high GDP growth rate) reduces the ICFS, although this effect is stronger for small-sized and standalone firms than the large-sized and business group affiliated firms. The authors find that macroeconomic condition has a positive and significant effect on investment decisions. Research limitations/implications This study has considered only the non-financial sector. The future research could explore the effect of macroeconomic condition on ICFS might be affected by firm other characteristics such as firm age and firm capital structure. Social implications The government should provide loan on the low rate to the small-sized firms and standalone firms because it is very difficult for these firms to finance their investment during the bad economic condition (period of low high GDP growth rate). Originality/value This study contributes to the existing literature by analyzing the impact of the macroeconomic condition on ICFS as well as investment decisions of the Indian manufacturing firms, which is an unexplored issue from an emerging market perspective. To the best of my knowledge, this is a first-ever study which explores the effect of macroeconomic condition on investment decisions with respect to business group affiliation and firm size.

Predicting Accruals Based on Cash-Flow Properties

2018 ◽  
Vol 93 (5) ◽  
pp. 165-186 ◽  
Author(s):  
Richard M. Frankel ◽  
Yan Sun
Keyword(s):  
Cash Flow ◽  
Serial Correlation ◽  
Cycle Length ◽  
Explanatory Power ◽  
Cash Flows ◽  
Flow Properties ◽  
Operating Cycle ◽  
Economic Role ◽  
Flow Changes

ABSTRACT Our goal is to understand the extent to which cash-flow properties explain accruals. Using the Dechow, Kothari, and Watts (1998) model, we derive a negative relation between accruals and cash-flow changes, and show that the strength of the relation is linked to negative serial correlation in cash-flow changes. Dechow et al. (1998) also suggest that the strength of the relation between accruals and revenue changes relates to operating cycle length. Prior accrual models have not incorporated these theoretical relations. We show that incorporating cash-flow changes, serial correlation in cash-flow changes, and operating cycle length increases explanatory power of all accrual models considered (i.e., Jones 1991; Ball and Shivakumar 2006; McNichols 2002; Jeter and Shivakumar 1999). We find that incorporating these variables in accrual models also improves specification and power, aids detection of earnings management in AAER firms, and produces a nondiscretionary accrual estimate that better predicts future cash flows and earnings. These results suggest the importance of considering the economic role of accruals when predicting accruals.

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