THE RELATIONSHIP BETWEEN SHARE PRICE AND OPERATING CASH FLOW UNDER THE CASUAL THEME RESTAURANT SETTING

In spite of the well-accepted belief of the relationship between cash flow and stock price, there are some controversies about whether cash flow is a good value driver in terms of explaining the volatility of stock prices, when compared with other value drivers, such as earnings or dividends. Most of the previous studies that have focused on the relationship between stock price and cash flow have used cross-industries data, primarily S&P 500 index. These studies do not distinguish service industry from manufacturing industry.However, the service industry is different from manufacturing in many ways. These differences make cash play different roles in the daily operation between the service industry and the manufacturing industry. Given these factors, whether the relationship between stock price and cash flow indentified in previous studies will hold in the casual theme restaurant industry is the question this study tries to answer. Therefore, a set of 20 casual theme restaurant companies are selected through the COMPUSTAT database as the sample of this study. In this study, the performance of cash flow, earnings and dividends helping to explain the stock price move will be compared and ranked under the setting of casual theme restaurants. This result will provide the management of casual theme restaurants a guideline, which explains how to maintain the stock price increase and minimize the volatility by monitoring the most important value driver of the industry. The methodology of this study will follow the traditional multiple valuation model. The logic of this model is to compare the pricing error of different value drivers and determine which one is the best. The results of this study show that operating cash flow outperformed earnings and dividends in the multiple valuation tests. This is different from the results of previous studies that earnings has the strongest explanatory power in the variance of share price.