The determinants of aggressive share buybacks: An empirical examination of U.S. publicly traded restaurant firms

It has become a common practice for restaurant firms to spend amounts exceeding their earnings on share buybacks by depleting their cash reserves or even by borrowing money. Given restaurant firms’ limited ability to generate internal cash and the high cost of debt financing, using these means to finance share buybacks could jeopardize restaurant firms’ long-term success. However, little is known about the factors influencing restaurant firms’ tendency toward this seemingly aggressive buyback behavior. This study revealed that the more restaurant firms’ earnings reduce, the greater their tendency is to conduct such aggressive share buybacks. This result could provide some evidence that managerial self-serving behavior plays a role in aggressive share buybacks in the restaurant industry. The study also demonstrated that the positive impact of reduced earnings on aggressive buybacks becomes stronger as a firm’s degree of franchising increases.