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.

Examining the determinants of long-term debt in the US restaurant industry

2017 ◽  
Vol 29 (5) ◽  
pp. 1501-1520 ◽  
Author(s):  
Kwanglim Seo ◽  
Ellen Eun Kyoo Kim ◽  
Amit Sharma
Keyword(s):  
Cash Flow ◽  
Boards Of Directors ◽  
Restaurant Industry ◽  
Growth Opportunities ◽  
Content Type ◽  
Financing Decisions ◽  
The Us ◽  
Restaurant Firms ◽  
The Impact

Purpose This paper aims to find alternative explanations for the use of long-term debt in the US restaurant industry from a behavioral perspective. The three-fold purpose of the present study is to examine the impact of CEO overconfidence on the use of long-term debt; explore how CEO overconfidence moderates the relationship between growth opportunities and long-term debt; and analyze the moderating role of CEO overconfidence based on cash flow levels in the context of the restaurant industry. Design/methodology/approach Using a sample of publicly traded US restaurant firms between 1992 and 2015, this study used generalized methods of moments with instrumental variable technique to analyze the panel data. Findings The findings of this study highlight the importance of considering behavioral traits of CEOs, such as overconfidence to better understand the US restaurant firms’ financing behaviors. This study found that overconfident CEOs tend to use more long-term debt when firms have greater growth opportunities and low cash flow. Practical implications Given that psychological and behavioral features of CEOs are critical in understanding the variations in corporate financing decisions and capital structure, shareholders and boards of directors of growth-seeking restaurant firms should incorporate the behavioral aspects of overconfident CEOs in the design of long-term debt contracts to mitigate liquidation risk while developing compensation practices that encourage overconfident CEOs to finance growth. Originality/value Despite its heavy reliance on long-term debt in the US hospitality industry, prior studies provided mixed findings for the determinants of long-term debt. This study makes a contribution to the literature by offering alternative approaches to examining long-term debt decisions among US restaurant firms.

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.

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.

scholarly journals An Examination of the Persistent Effects of Franchising Strategy on Large Chains

2018 ◽  
Vol 9 (1) ◽  
pp. 33
Author(s):  
Vinay Kumar Garg
Keyword(s):  
Interior Design ◽  
Manufacturing Sector ◽  
Resource Scarcity ◽  
Restaurant Industry ◽  
Us Economy ◽  
The Us ◽  
Retail Chains ◽  
Quick Service ◽  
High Share ◽  
Very High

In the US economy, retail chains are extremely important since they account for a very high share of GDP relative to manufacturing sector. Retail is dominated by large franchised chains, particularly in the restaurant industry. A proven business format comprising a differentiated menu, exterior and interior design of the outlet, logos, etc., draws the interest of many prospective franchisees simultaneously, especially to large chains because it reduces their risk. Theoretical arguments are built, supported in relevant research, to present three hypotheses. Together, they form a theory of how franchising helps large chains despite abating of resource scarcity and escalation of threat from agency problems. Developing such a theory is important because extant research does not adequately address the boundary condition of large chains, even though many of them have been becoming from large to mega for many years. This theory is tested in a longitudinal sample from Quick Service Restaurant magazine, which has been publishing a list of top 50 restaurant chains for many years. All of three hypotheses are strongly supported. The paper closes with discussion of results and their implications for practice and research.

Investment-Cash Flow Sensitivity and Access to Foreign Capital of Overseas Listed Indian Firms

2003 ◽  
Vol 28 (1) ◽  
pp. 47-60 ◽  
Author(s):  
Manoj Kumar ◽  
L M Bhole ◽  
Shahrokh M Saudagaran
Keyword(s):  
Cash Flow ◽  
Capital Markets ◽  
Foreign Capital ◽  
Foreign Markets ◽  
Firm Level ◽  
Informational Asymmetry ◽  
Flow Sensitivity ◽  
The Us ◽  
External Capital ◽  
Cash Flow Sensitivity

Between May 1992 and June 2001, 72 Indian firms listed their 85 Depositary Receipt (DR) programmes on the foreign capital markets. Most Indian DR programmes are listed on the European exchanges rather than on the US exchanges. This paper studies firm-level financial data of foreign listed Indian firms to see whether the ‘improved access to external capital markets’ is an important consideration for Indian firms listing on the foreign markets. The results of the study can be interpreted in terms of informational disclosure requirements of the foreign markets (in our case the Global Depositary Receipts– GDR markets) where sample Indian firms have listed their securities. The firms listed on the US exchanges have to necessarily follow US GAAP in casting of their accounts and disclose more. Hence, US listing acts as a signal about the firm's level of transparency and disclosures which, in turn, reduces informational asymmetry between managers and external investors. Thus, listing of emerging markets' firms on the US exchanges improves their access to the external capital markets and hence reduces their investment-to-cash flow sensitivity. Also, till recently, two-way fungibility in the Indian DRs was not allowed. Foreign institutional investors (FIIs), investing in the Indian GDRs, are restricted from owning and trading in Indian shares listed on the Indian stock exchanges. Besides, Indian citizens were prohibited from owning and trading in Indian DRs listed on the foreign markets. These factors impede the free flow of information between the GDR markets and Indian markets. Thus, GDR listings by the Indian firms are rendered ineffective in removing the information asymmetry about the listing firms and in improving Indian firms' access to the external markets. The results of the study have the following implications: The policy makers should adopt a regulatory framework so that firms are encouraged to disclose more and thus become transparent. Managers should prefer listing firms' securities only on stringent and transparent foreign markets with listing requirements. The measures proposed will reduce the informational asymmetry for the Indian firms and hence improve their access to the external capital markets. But if these markets do not improve their transparency and disclosure levels, they will lose out to the US markets. Naturally, firms contemplating fresh listing on foreign markets will list their securities on the more transparent US markets to improve their access to the external capital markets. Corporate decision makers should realize that the listings on the US markets send strong signals about the firms' level of transparency and disclosures to the investing community. This signalling effect is rather less in case of listing on the GDR markets. This could be the reason for US exchanges becoming more successful in attracting foreign listings by the Indian firms compared to the London and the Luxembourg exchanges in recent years.

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