Is restaurant franchising capital a substitute for or a complement to debt? |
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| Institution: | 1. Department of Foodservice Management, College of Hospitality and Tourism Management, Sejong University, Seoul, South Korea;2. School of Hospitality and Tourism Management, Purdue University, West Lafayette, IN 47907-0327, United States;1. Department of Economics, National Chi Nan University, University Road, Puli, Nantou 54561, Taiwan;2. Department of Economics, South Dakota State University, Box 504, Scobey Hall Room 109, Brookings, SD, USA;1. Montpellier Business School, France, and Lancaster University Management School, UK;2. Isenberg School of Management, University of Massachusetts-Amherst, 121 President Dr, Amherst, MA 01003, USA;1. School of Hospitality Administration, Boston University, 928 Commonwealth Avenue, Boston, MA 02215, USA;2. School of Applied Sciences, Department of Hotel Management, Ozyegin University, Cekmekoy, Istanbul 34794, Turkey;1. Department of Hospitality and Tourism Management, Virginia Tech, Blacksburg, VA 24061, USA;2. Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston, 229 C.N. Hilton & College, Suite 236, Houston, TX 77204, USA;1. The Bessie Morgan Marshall Professor of Hospitality Management, Dedman School of Hospitality Management, 288 Champions Way, UCB 4112, P. O. Box 30306541, Florida State University, Tallahassee, FL 32306-2541, USA;2. Rosen College of Hospitality Management, University of Central Florida, Orlando, FL 32819, USA;3. School of Hotel, Restaurant and Tourism Management, College of Hospitality, Retail and Sport Management, University of South Carolina, Columbia, SC 29208, USA;4. Dedman School of Hospitality, Florida State University, Tallahassee, Florida 32306-2541, USA |
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| Abstract: | 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. |
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| Keywords: | Franchise financing Capital structure Substitute Complement Debt leverage |
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