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

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  • Kwanglim Seo

    (University of Hawaii, USA)

  • Jungtae Soh

    (The Pennsylvania State University, USA)

  • Amit Sharma

    (The Pennsylvania State University, USA)

Abstract

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.

Suggested Citation

  • Kwanglim Seo & Jungtae Soh & Amit Sharma, 2018. "Do financial constraints affect the sensitivity of investment to cash flow? New evidence from franchised restaurant firms," Tourism Economics, , vol. 24(6), pages 645-661, September.
    • Handle: RePEc:sae:toueco:v:24:y:2018:i:6:p:645-661
    DOI: 10.1177/1354816618768315
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    References listed on IDEAS

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    Cited by:

    1. Jaehee Gim & SooCheong Jang, 2024. "The determinants of aggressive share buybacks: An empirical examination of U.S. publicly traded restaurant firms," Tourism Economics, , vol. 30(1), pages 132-151, February.

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