Factors Affecting the Long-Term Debt Decision of Restaurant Firms

Abstract

The purpose of this article is to evaluate the impact of previously theorized factors on the long-term debt ratio of publicly traded restaurant firms. The authors examined the financial literature to find variables related to three capital structure theories: contracting costs of debt, signaling effects, and tax effects. Using a cross-sectional pooled regression model on publicly traded restaurant firms, the authors’ results largely confirm those of Barclay and Smith that were based on a wide range of industrial firms. Firm size and the probability of bankruptcy are positively correlated with higher long-term debt ratios. Firms with growth opportunities use less long-term debt. However, no significant relationship was found between the use of long-term debt and effective tax rates.