Cash regimes and the franchise system: An extension of the marginal value of cash

The main purpose of this study is to examine the marginal value of cash in franchise restaurants by extending Faulkender and Wang's three cash regimes into the franchise framework. Utilizing theoretical underpinnings from prior studies, this study attempted to verify that franchising is a quasi-debt financing tool for restaurant firms. The sample used in this study was retrieved from Compustat and 10-K annual reports from 1980 to 2015. The results of this study revealed that "raising cash" and "servicing debt" regimes are common in the restaurant industry. This study also found that shareholders place a lower value on the marginal value of cash for franchise restaurants compared with non-franchise restaurants. Furthermore, the market value of additional cash for franchise restaurants decreased when the proportion of franchise sales increased. This study confirmed Norton's argument that franchising funds are not simply cheap capital. Furthermore, this study found that the value of cash holdings decreased for franchise restaurants based on the level of franchising operations.