This study identifies the financial characteristics that tend to distinguish cash-rich from cash-poor publicly traded US restaurant firms operating in the 1999–2010 period. The resulting logistic regression model, developed from a forward stepwise selection procedure, is able to classify sampled firm-year observations into cash-poor and cash-rich groups with a 73.4% accuracy rate. The authors find that cash-rich restaurant firms tend to have greater investment opportunities, which make cash in hand appealing. However, cash-poor restaurants are more likely to be larger, to hold more liquid-asset substitutes, to make greater capital expenditures and to display more robust cash flows – characteristics that enhance borrowing power and/or reduce the need to hoard funds. Hence, the findings suggest a prominent role for the precautionary and transaction motives in restaurant cash-holding decision making.
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