Why Do Restaurant Firms Initiate Dividends?

The U.S restaurant industry has experienced strong growth since 1970 (National Restaurant Association, n.d.). Publicly traded restaurant firms tend to initiate dividends soon after they go public, quite often even in the same year. This study tests hypotheses based upon four dividend initiation theories: signaling, life-cycle, agency costs and catering. The results reveal that only the signaling theory is significant. Since most restaurant firms initiate dividends at the growth stage, they tend to have little free cash flow, high investment opportunities, and low dividend premiums (which are less favorable to investors).