Does franchising pay? Evidence from the restaurant industry

Abstract

Franchising has taken a prominent position in service industries for several decades, but little is known about how franchising affects financial performance. Thus, we addressed the question of whether chains that franchise to some extent outperform those that are wholly owned. Then, among chains that franchise, we also addressed the question of whether more franchising is better -that is, whether the proportion of a chain's units that are franchised is associated with superior financial performance. To answer these questions, our study first compares the risk-adjusted performance of franchising vs. non-franchising restaurant firms. Second, it investigates the relationship between franchising propensity and firm financial performance. We considered five different measures of firm financial performance: the Sharpe ratio, the Treynor ratio, the Jensen index, the Sortino ratio, and the upside potential ratio. On comparison of franchising and wholly owned firms, all five measures indicated that franchising firms outperformed their non-franchising counterparts. When we focussed on just the franchising firms, however, the results were less clear. Among firms that franchise, the franchising-performance relationship was positive and significant only with respect to the Jensen index. Thus, we provide very robust evidence that franchising pays -that is, that some franchising is good -but among firms that franchise, it is unclear whether more franchising is better.

Competing models of quality management and financial performance improvement

“…Firstly, numerous prior studies have examined how a range of factors impact financial performance in the service sector. These factors include: international expansion (Contractor, Kundu, & Hsu, 2003); customer perspective (Liang & Wang, 2008); interorganizational relationships (Gloede, et al, 2013); ownership (Gelübcke, 2013); franchising (Madanoglu, Lee, & Castrogiovanni, 2013); service innovation (Ryu & Lee, 2016); online rating (Ding, Guan, Fang, & Lee, 2017); human resource development (Chatterjee, 2017); corporate social responsibility (CSR) (Kim, Kim, & Qian, 2018); CSR and knowledge acquisition (Sinthupundaja, Chiadamrong, & Kohda, 2018); oil price changes (Katırcıoglu, Ozatac, & Taspınar, 2018). Although these studies have contributed to the debate on factors positively or negatively impacting financial performance, our understanding of models that could improve financial performance in the service sector is still limited.…”

Franchising and initial public offering: a signaling perspective

“…As a data source, Entrepreneur magazine is typically deemed very reliable and has been used in several academic papers on franchising (e.g. Lafontaine, 1992; Combs and Castrogiovanni, 1994; Castrogiovanni and Justis, 2002; Elango, 2007; Tsang and Finnegan, 2013; Pénard and Perrigot, 2013; Madanoglu et al , 2013; Grunhagen et al , 2008, etc.). We focused on the most recent two years (2015–2016) prior to the start of this study.…”

The upper echelon effect on restaurant franchising: the moderating role of internationalization

“…Therefore, Laschley and Morrison (2001) claimed that the restaurant industry is a fertile potential area for franchising research because of its size and contribution to the US economy. The economic value and argument of Laschley and Morrison (2001) have motivated several researchers to examine the characteristics of franchising in the specific context of the restaurant industry (Roh, 2002; Combs et al , 2004; Hsu and Jang, 2009; Koh et al , 2009; Hsu et al , 2010; Madanoglu et al , 2013; Lee et al , 2015).…”