Sequential Impact of General Interest Rate Changes on the Interest Expense of Publicly Traded Restaurant Firms

Abstract

It is generally known that restaurant firms are very capital intensive, largely due to the significant amount of capital expenditures required to expand. Therefore, restaurant firms are critically dependent upon borrowed capital for financing new locations. This would imply that interest expense is a significant expense for most restaurant firms. Therefore, any changes in the interest rates in the general economy have the potential of having a major impact on restaurant firm earnings, even without an accompanying change in the eating-out behavior of consumers.

The interest of this study was in determining the sequential impact of the general interest rates (federal funds target rate) on the firm specific effective after-tax interest rate, which are, in turn, related to the cost of capital of the firm. Empirical evidence on this relationship is provided, along with magnitude and lag information of the relationship. Both short-term and long-term debt, as well as quarterly and annual data of firms, are used.

Findings indicate that changes in the federal funds interest rate have small sequential impacts on the effective interest rates for restaurant firms. In other words, changes in federal rates affect the effective interest rates of restaurant firms in a decreasing fashion. The more recent the changes in federal rates, the less the impact on the effective interest rates.

KEYWORDS:

• interest expense
• interest rates
• cost of capital
• short-term debt
• long-term debt