The Relevance of Financial Leverage for Equity Returns of Restaurant Firms—An Empirical Examination

Abstract

Cross-sectional time series regressions were used to examine the relationship between the debt/equity ratios of 37 firms in the restaurant sector and their risk/size-adjusted common equity returns. Findings reveal a statistically significant relationship between a restaurant firm's debt/equity ratio and its risk/size-adjusted common equity returns. The relationship holds true regardless of the January effect, and regardless of the use of real or nominal returns. As such, the findings support the issue of capital structure relevance in the restaurant industry, and are suggestive of a strategic relationship between a restaurant firm's debt use and the growth in its market-to-book value.

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