Who makes acquisitions? An empirical investigation of restaurant firms

The purpose of this study is to examine the financial and operational factors that explain acquisition decisions in restaurant firms. We analyze the effects of franchising, dividends, leverage, Tobin's Q, total assets, sales growth, and cash flows on restaurant firms' acquisition decisions. The findings show that firms with high growth prospects and excess cash flows (i.e. small firms and franchising restaurant firms) are more likely to make acquisitions than their counterparts. Furthermore, firms with higher dividend payouts are less likely to engage in acquisition deals due to lack of cash. Shareholders perceive acquisitions to be value-decreasing only if large restaurant firms (not necessarily franchising) make acquisitions, while shareholders perceive acquisitions to be value-increasing when franchising firms make acquisitions. The findings provide partial support for the postulations of overinvestment and underinvestment theories. Theoretical and practical implications are discussed.