Firm growth patterns: Examining the associations with firm size and internationalization

Understanding the growth patterns of an industry is essential for establishing sustainable growth strategies. However, until recently little had been known about restaurant firm growth patterns. Thus, this study examined the growth patterns of restaurant firms in association with firm size class and internationalization, after controlling for total and long-term debt leverage, retained earnings, and growth opportunity. Overall, the results of this study showed that small restaurant firms grow faster than large restaurant firms but the growth rate decreases as firm size increases. Furthermore, the growth rate of large firms decreased more slowly than small firms. In terms of internationalization, this study found that as firm size increases, the growth rate of small international firms decreases more rapidly than that of small domestic firms. However, the growth rate of large international firms decreases more slowly than that of large domestic firms. These findings indicate the appropriateness of internationalization strategies for large restaurant firms but the inappropriateness of these strategies for small firms. More detailed results and discussion are also provided.     

Effects of restaurant franchising: Does an optimal franchise proportion exist?

Franchising has significantly affected the US economy, contributing to a rapid growth of its retail sales. To identify whether franchising influences a restaurant firm's financial performance, this study investigated (1) the profitability and intangible values of both franchise and non-franchise restaurant firms and (2) the effect of the combination of franchised and company-owned outlets of restaurant firms (i.e., franchise proportion). The results of this study showed that (1) franchise firms had significantly higher profitability than non-franchise firms and (2) the relationships between franchise proportion and firm profitability and intangible value were curvilinear (inverted U-shape), verifying the existence of an optimal franchise proportion. The results propose a possibility that restaurant franchisors could maximize their profitability and intangible value with an optimal franchise proportion when other variables held constant, implying that it is important to pay attention to the franchise proportion together with other management strategies.     

Does a minimum wage increase endanger restaurant jobs? Examining the role of franchising

This study examined the effect of federal minimum wage increases on the U.S. restaurant industry. Based on the competitive labor market perspective, this study expected that minimum wage increases would negatively (positively) influence restaurant employment (compensation), while franchising would positively moderate the minimum wage-employment (minimum wage-compensation) relationship. The results of the analysis showed that minimum wage increases negatively influence employment, while franchising positively moderates the adverse effect of minimum wage increases on restaurant employment. This study also revealed that minimum wage increases positively influence per employee compensation, but franchising does not significantly moderate the relationship. This study suggested that franchising provides a buffer that absorbs the adverse effects of minimum wage increases on restaurant employment. Conversely, franchise restaurants may face potential service quality issues because franchise firms seem to strategically adjust full-time employees to part-time workers to address minimum wage increases.     

Inter-relationship between firm growth and profitability

There is a widespread presumption that there is a close link between firm growth and profitability. However, most of the past studies on firm growth and profitability have been conducted without mutual associations. Only a few studies, thus far, have scrutinized the inter-relationship between firm growth and profitability and the results have been inconsistent. The main reason for this inconsistency is due to the lag structure of the models in each study. To address the issue, this study conducted panel unit-root tests on firm growth and profitability separately and then made appropriate models using dynamic panel system GMM estimators. Through analyzing these models, this study found that in restaurant firms the prior year's profitability had a positive impact on the growth rate of the current year. However, the current and prior year's growth rates had a negative impact on the current year's profitability. This outcome implies that in the restaurant industry profit creates growth but growth impedes profitability. Further implications are also discussed in this paper.     

Growth-focused or profit-focused firms: Transitions toward profitable growth

Profitable growth is the most desirable state tourism and hospitality firm managers can hope to achieve. In reality, however, it is not easy for a tourism and hospitality firm to consistently grow and accumulate profits. In order to achieve profitable growth, some firms focus on sales growth while victimizing profits, while others concentrate on profits and hold off on growth. To better understand these strategies, this study investigated the growth state, profit state and transitions of restaurant firms. The findings of this study supported that profit-focused firms are more likely to achieve profitable growth than growth-focused firms. In addition, growth-focused firms with low liquidity had a higher likelihood of transitioning to a state of low growth and low profit in the short-term, and this liquidity effect was more serious for small firms in terms of long-term performance. Further, when profit-focused firms had few growth opportunities, large free cash flows increased the likelihood of transitioning to a state of low growth and low profit in the short-term. More detailed results are provided in this paper.     

Intangible asset value of employee satisfaction in high-contact services

In this study, we utilize the employee online review data from Glassdoor to examine whether stock market capitalizes the intangible asset value of employee satisfaction for high-contact service firms. We hypothesize that in the hospitality and tourism industry, employee satisfaction can efficiently motivate employees to deliver high-quality service and improve the employee retention, thereby leading to greater shareholder value. Our finding is consistent with this prediction that stock market investors indeed incorporate the intangible value of employee satisfaction into the valuation models. In addition, we find that the value of such intangible asset manifests in firm’s subsequent profitability, resulting in improved return on asset (ROA). We further decompose ROA into profit margin and asset turnover to explore the pathways by which employee satisfaction affects shareholder value. We find that employee satisfaction can improve both profit margin and asset turnover for high-contact service firms. Overall, our study suggests that employee satisfaction can be an important intangible asset that contributes to the service firms’ long-term value.     

Effects of different dimensions of corporate social responsibility on corporate financial performance in tourism-related industries

Although the stakeholder framework proposes the multidimensionality of corporate social responsibility (CSR) (Clarkson, 1995), previous research has yet to investigate the relationship between certain dimensions of CSR and corporate financial performance (CFP) in tourism-related industries. The purpose of this study was to disaggregate CSR into five dimensions based on corporate voluntary activities for five primary stakeholder issues: (1) employee relations, (2) product quality, (3) community relations, (4) environmental issues, and (5) diversity issues, and examine how each dimension would affect financial performance among firms within four tourism-related industries (airline, casino, hotel, and restaurant). While all CSR dimensions were proposed to have positive financial effects, results revealed that each dimension had a differential effect on both short-term and future profitability and that such financial impacts varied across the four industries. The findings can provide tourism managers with insights into which dimensions of CSR activities would improve their companies’ financial performance.     

Revisiting the financing behavior of restaurant firms: The firm-size perspective

In International Journal of Hospitality Management, Jang and Ryu [Jang, S., Ryu, K., 2006. Cross-balance sheet interdependencies of restaurant firms: a canonical correlation analysis. International Journal of Hospitality Management 25 (1), 159–166] published a research article about the financing behavior of restaurant firms, using a canonical correlation analysis. Even though the study presents a general picture of financing in restaurant firms, the financing behaviors of firms of different sizes may differ because they often face different financing environments. Thus, this study re-examines restaurant firms and compares the results with Jang and Ryu [Jang, S., Ryu, K., 2006. Cross-balance sheet interdependencies of restaurant firms: a canonical correlation analysis. International Journal of Hospitality Management 25 (1), 159–166] to further enhance the understanding of the financing behaviors. The results show that, despite the differences in firm sizes, overall financing behaviors are similar to those reported by Jang and Ryu [Jang, S., Ryu, K., 2006. Cross-balance sheet interdependencies of restaurant firms: a canonical correlation analysis. International Journal of Hospitality Management 25 (1), 159–166], although they also suggest that restaurant firms of different sizes do indeed exhibit some different cross-balance sheet interdependencies including relatively more reliance on accounts payable among small and medium firms and more use of long-term debts among large firms. Moreover, long-term assets related to stockholder equity more among large firms but related to supplier credit more among small and medium firms.     

Mergers and acquisitions and firm growth: Investigating restaurant firms

Merger and acquisition (M&A) has been viewed as an efficient strategy for firm growth because M&As allow firms to quickly achieve their ideal size. However, whether consistent growth can be maintained after an M&A is questionable because post-M&A integration is a difficult process. In order to identify whether M&A is really an effective tool for producing consistent growth in restaurant firms, this study examined post-M&A firm growth in comparison to non-M&A firm growth. Using financial data from 1980 to 2007, this study analyzed the sales growth of restaurant firms up to five years after an M&A. This study found that post-M&A growth patterns varied across firm sizes and time periods (from one to five years after an M&A). This study also revealed that both small and large acquirers experienced positive sales growth in the year following M&A. However, this positive effect completely disappeared during or after the third year post-M&A. M&A firms showed the same growth patterns as non-M&A firms three to five years after an M&A. This study provides useful post-M&A growth information regarding restaurant firms, which can be practically useful for firms considering M&A.     

Duration of advertising effect: Considering franchising in the restaurant industry

How long do the effects of advertising actually last? This issue has received increased attention in the fields of marketing, accounting, and finance. However, despite the importance of advertising for firm management, research on the effective duration of advertising costs still remains in the exploratory stage. To address this research need, this study investigated how long advertising costs function to increase sales and intangible value in association with franchising in the restaurant industry. The results of this study showed that advertising expenditures had a positive short-term effect on sales growth, whereas advertising did not significantly impact sales growth in the long run. However, when advertising expenditures were considered together with franchising, the long-term interaction effect was positively significant. The results suggest that advertising has long-term positive effects on sales growth only in restaurant firms using a franchising system. This implies that advertising costs should be recognized as investment-like assets only in franchising restaurant firms. On the other hand, advertising ratio had both positive short-term and long-term effects on intangible value. In addition, once the advertising ratio was associated with franchising, the long-term interaction effect was negatively significant. More detailed explanations and implications are included in the conclusion.     

An examination of executive compensation in the restaurant industry

The purpose of this empirical study is to examine executive compensation in the restaurant industry. The effects of a set of accounting-based performance measures, market-based performance measures, and executive-related factors on the compensations of firm CEOs, other senior executive managers, and board members were examined. Drawn from 16 consecutive years of data and a sample of over 2200 observations from restaurant companies, the findings revealed that determinants of equity based compensation vary by different types of executives. In addition, this study supports the notion that executive compensation in the restaurant industry is determined not only by firm performance measures but also by executive-related characteristics such as tenure.     

Do socially responsible activities help hotels and casinos achieve their financial goals?

While the concept of corporate social responsibility (CSR) has gained much attention and is currently practiced by many companies, it has yet to be empirically examined in the context of hotels and casinos, especially in regard to the potential effects of CSR on firm value and performance. As the findings on the relationship between CSR and financial performance have been inconclusive and this relationship has been found to differ among industries, this study examines the relationship between CSR and firm value and profitability for hotels and casinos. Results of the Durbin–Wu–Hausman (DWH) test and a subsequent two-stage least square (2SLS) method show that hotel companies’ CSR has a simultaneous and positive relationship with financial performance. For casino companies, however, results show that CSR has no simultaneous or particular effect on financial performance. Findings suggest that hotel companies can confidently and strategically increase CSR investment to enhance both short-term (profitability) and long-term performance (firm value). Casino companies need to carefully examine the effects of CSR on financial performance, when making CSR-related decisions.     

Working capital,cash holding,and profitability of restaurant firms

Efficient working capital management is becoming important for restaurant firms coping with weak financial conditions and increased economic uncertainty. This study investigates the impact of restaurant firms’ working capital on their profitability. We further examine the effects of firms’ cash levels on the relationship between working capital and profitability. The findings ascertain a strong inverted U-shape relationship between working capital and a firm's profitability, which indicates the existence of an optimal working capital level for restaurant firms. This study also reveals that a firm's cash level is an important factor for efficient working capital management. The results suggest that interactive effects exist among working capital, cash levels, and profitability. Thus, restaurant managers should consider these different roles and impacts when developing an efficient working capital management strategy. Detailed results and implications are presented in the main body of this paper.     

Have restaurant firms been using right recession turnaround strategies?: Evaluating with propensity score measure

Among the diverse strategies that restaurants use in recessions, some studies have shown that strategies that increase advertising, profit margins, or asset turnover have yielded promising results in terms of firm performance. However, the success of these turnaround strategies might be due to the health or size of a firm rather than the implementation of these strategies. Therefore, this study empirically tested this question utilizing the propensity score measure (PSM) due to concerns with selection bias across restaurant segments. The results showed significant improvements in revenue for limited-service and franchise restaurants when aggressive advertising was used but no improvements in profitability. The profit margin strategy had no impact on revenue but affected profitability and stock returns positively for all segments. Finally, the asset turnover strategy had adverse effects on revenue the year after a recession for all segments. These mixed results suggest that managers need to be cautious when implementing recession turnaround strategies.     

Is restaurant franchising capital a substitute for or a complement to debt?

Since Oxenfeldt and Kelly’s 1969 study, the resource scarcity hypothesis has been considered a representative theory to explain franchising motivations. Whether franchising capital is a substitute for or a complement to debt has been discussed in the franchise literature but the relationship remains unclear. Using Frank and Goyal’s (2003) financial deficit model along with trade-off and pecking order theories, this study shed light on whether franchising capital acts as a substitute for and/or to complement debt in the restaurant industry. This study discovered that the adjustment speed of long-term debt leverage was faster for franchise restaurant firms than non-franchise restaurant firms. Further, the average long-term leverage target was lower for franchise restaurants. Consequently, this study revealed that franchising capital functioned as a substitute for long-term debt. In contrast, the adjustment speed of short-term debt leverage was slower for franchise restaurants and, thus, franchising capital complemented short-term debt.     

Does a VAT rise harm the tourism industry?Portuguese evidence

This paper estimates consequences of the VAT increase on tourism industry, by analysing the impact of the significant VAT rise in Portugal on profitability and survival of firms related to food and beverage service activities. The analysis is divided into 3 periods: before and after the VAT hike and during the financial crisis, with the total time period from 2003 to 2013. The sample is composed of 23,388 Portuguese unique firms with 5.1 year-observations per firm. The impact of the massive VAT change is assessed in comparison to the performance of 4,969 Greek and 59,841 Spanish (for robustness) unique firms for the exact time period. The results show that a dramatic VAT increase significantly affects firm profitability in the country of implementation, with the effect even more dramatic than the recent financial crisis. The equivalent to the proposed 10 percent VAT rise in Portugal has caused a significant decline in firm profitability (an average drop of 8.7% compared to 1.5% during the financial crisis), a massive increase in the number of inactive firms and amplified the likelihood of firms to become bankrupt by about three times. Such consequences inevitably affect unemployment and may cause a slump in tax revenue in the long run. Hence, this research has wide practical implications and should be considered by the Greek and Portuguese governments before taking a next step of intervening in the tourism sector.     

Does risk matter in CEO compensation contracting? Evidence from US restaurant industry

The structure of compensation packages of Chief Executive Officers (CEOs) has been a significant research interest for researchers across various disciplines. In this paper, we examine a unique relationship between CEO compensation and risk (systematic risk) in the US restaurant industry. Our research question stems from the assumption that CEOs must be rewarded with a higher incentive-based compensation in high-risk profile restaurant companies in order to motivate them to perform in their full potential for mutual benefits of the CEO and shareowners. Furthermore, we investigate whether firm risk moderates the relationship between firm performance and CEO total compensation controlling for the firm size and CEO ownership. We draw our sample firms from the US restaurant industry. Findings of our study suggest that firm risk induces a higher proportion of incentive-based compensation for restaurant companies’ CEOs, and firm risk does not seem to moderate the relationship between pay and performance in the restaurant industry.     

Effects of within-industry diversification and related diversification strategies on firm performance

The major objective of this study was to investigate the effects of within-industry diversification and related diversification on short and long-run firm performance in the restaurant industry. Accordingly, this study decomposed Jacquemin and Berry's (1979) traditional related diversification entropy into within-industry diversification entropy and pure related diversification entropy. Further, this study examined the interaction effect of within-industry and related diversification strategies on firm performance. The results of this study suggested that in the short-run within-industry diversification strategies have a negative impact on firm profitability but no significant effect on sales growth. However, the long-run effect of within-industry diversification was significantly positive in terms of profitability but not sales growth. This study also showed that related diversification strategies had a positive and significant effect on profitability in the short-run, which turned negative and significant in the long-run. Further, the interaction model indicated that when the two strategies are simultaneously carried out synergy is quickly realized because efficiency is enhanced. A more detailed discussion of the results is provided in the main body of this paper.     

The effect of environment risk,corporate strategy,and capital structure on firm performance: An empirical investigation of restaurant firms

The co-alignment process has been used in hospitality strategy as a framework to explain strategic orientation of firms. In this study, using a sample from the US restaurant industry, the authors test the simultaneous impact of surrogates from constructs identified as part of the co-alignment model, i.e. environment, strategy, and structure, on firm performance. Results indicate that a significant variance in firm performance is explained by the variables from the foregoing constructs of the co-alignment model. The robustness of this study provides restaurant firms’ managers a basis to evaluate their firms’ strategic orientation vis-à-vis its impact on firm performance.