Effects of Financial Constraint on Capital Investment and Business Failure in Restaurant Industry
Abstract
This study strongly suggests that the restaurant firm specific financial constraint index (RFC index) is superior to dividend payout ratio, the Kaplan and Zingales index, and the Cleary index as a measurement of the level of a restaurant firm’s financial constraint based on all comparison results. First of all, the RFC index is based on undisputable ex-ante financial constraint criteria and reflects restaurant industry-specific characteristics of financial constraint. Second, restaurant firms’ operating profitability, debt, the amount of assets that can be used as collateral, necessity for supplementary funds, and human resource management practices are excellent indicators of the firms’ financial constraint. Third, the capital investment behaviors of restaurant firms that experience normal operational performance (or positive operating cash flow) are positively influenced by operating cash flow, but negatively influenced by financial constraint. However, the capital investment behaviors of restaurant firms that face extremely poor operational performance (or negative operating cash flow) are not symmetrical, and thus may not be anticipated monotonic. Fourth, overall, financial constraint has a significant direct negative effect on restaurant firms’ capital investment. However, the level of financial constraint has a significant negative moderating effect on the relationship between operating cash flow and capital investment in restaurant firms with positive operating cash flow but it turns into insignificant in restaurant firms with negative operating cash flow. Lastly, financial constraint significantly increases the probability of restaurant firms’ business failure. Thus, this study suggests that financial constraint is one of the most serious difficulties among many other business obstacles in restaurant firms for sustainable growth and survival.
Degree
Ph.D.
Advisors
Jang, Purdue University.
Subject Area
Finance
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