Heterogeneous dividend behaviors: The role of restaurant franchising

The so called "dividend puzzle" has prompted many researchers to examine industry-specific factors in order to explain the dividend behaviors of various industries. However, due to the unique differences in characteristics between franchise and non-franchise restaurants, it may not be appropriate to view the restaurant industry as one entity displaying homogenous dividend behaviors. In this regard, this study investigated the role of franchising in explaining the dividend behaviors of the restaurant industry. The results of this study demonstrate that the dividend behaviors of franchise restaurants are a function of the size of institutional holdings and prior dividend payments, while those of non-franchise restaurants depend on the degree of growth opportunity and financial leverage. The findings further imply that franchise restaurants with higher free cash flows and the resulting information asymmetry closely follow agency theory and signaling theory, whereas non-franchise restaurants with insufficient internal cash strictly follow the pecking order theory.