Title

Acquisitions and Shareholders' Returns in Restaurant Firms: The Effects of Free Cash Flow, Growth Opportunities, and Franchising

Document Type

Article

Publication Date

6-27-2019

Publication Title

International Journal of Hospitality Management

Volume

84

First page number:

1

Last page number:

9

Abstract

Restaurant firms extensively expand through acquisitions. While acquisitions can be an efficient business strategy, the extant literature presented evidence showing that acquisitions can be value–increasing or –decreasing investments. However, why acquisitions increase or decrease firm value is not clear. Corporate finance and franchising theories collectively suggest that the value of acquisitions may depend on firms’ free cash flow capacities, growth opportunities, and organizational forms. The purpose of this study is to examine the concurrent effects of free cash flows, growth opportunities, and franchising on restaurant firms’ returns from acquisitions. The results showed that firms with high-free cash flows gain lower returns compared to firms with low-free cash flows, suggesting that acquisitions reduce underinvestment problems but also increase overinvestment problems. Franchising firms also gain lower returns compared to non-franchising firms; however, the availability of free cash flows exacerbates overinvestment problems in franchising firms. Theoretical and practical implications are discussed.

Keywords

Franchising; Restaurants; Aquisitions; Growth; Free cash flows; Overinvestment; Underinvestment

Disciplines

Gaming and Casino Operations Management

Language

English

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