Investment–cash flow sensitivities of restaurant firms: A moderating role of franchising

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.