Quality signaling through ex-ante voluntary information disclosure in entrepreneurial networks: evidence from franchising

Abstract

This paper examines antecedents of ex-ante voluntary information disclosures for standardized contracts in entrepreneurial networks. Entrepreneurs (e.g., franchisors) may make such disclosures to prospective business partners in order to signal profitability of partnering, attract financial and managerial resources and develop their entrepreneurial networks. In practice, only a fraction of franchisors make financial performance representations (FPR), an ex-ante voluntary information disclosure to prospective franchisees. We address gaps in the signaling, voluntary information disclosure, franchising, entrepreneurship and small and medium enterprises (SME) literatures. We draw on signaling theory to develop a theoretical framework and investigate factors that influence a franchisor's disclosure decision. We evaluate hypotheses from our theoretical framework through econometric analyses of multi-sector panel data for the U.S. franchising industry. We estimate a logit model and use lagged independent variables to address our dichotomous independent variable and potential endogeneity respectively. Our results support the view that firms signal their quality through FPRs to attract potential business partners and expand their entrepreneurial networks. Beyond the extant literature, we find that a rigorous partner qualification mechanism is another driver of voluntary information disclosure in franchising. Our findings also provide empirical support for the complementary role played by multiple quality signaling mechanisms used by franchisors and yield public policy implications for franchising.

“Conflict-performance assumption” or “performance-conflict assumption”: Insights from franchising

“…As illustrated in the verbatims above, interviewees prioritize financial performance of their stores over any other performance-related goals such as the quality of their relationship with their franchisors, as mentioned in the literature review section. In fact, performance and profitability are the most salient features franchisee candidates look for when joining a franchise chain (Sadeh and Kacker, 2018), and franchisee pay attention to when operating their stores (Weaven et al, 2010). When franchisees perform well, there is no complaint.…”

Does the e-marketing determine the sustainable performance of firm’s Sportswear industry in Thailand

“…The previous research studies have neglected the SFP to be mediated by e marketing. The focus of traditional scholars have been on the western organizations and it is crucial for the Thailand firms to incorporate e marketing practices to achieve sustainable performance in the sports sector (Sadeh & Kacker, 2018). It was recommended by (Iddris & Ibrahim ,2015) that it is important to develop a relation between sustainable performance of business and e marketing.…”

Using Websites to Recruit Franchisee Candidates

“…This functional content, similar to mandatory pre-contractual information, is useful for the rational decision-making we would expect to find in B2B sectors (Lilien et al 2010). When a prospective franchisee assesses a new business opportunity, profitability comes to mind (Sadeh and Kacker 2017). However, there are other topics that franchisors may cover on their websites, including parts of the mandatory disclosure documents, and not all of these may be conducive to persuading candidates to join their chains.…”

“…Third, signalling theory emphasizes that to attract resources, the informed party (i.e., the franchisor) must decide whether and how to reveal information (Michael 2009). Potential franchisees might intuit that reasons for withholding information might be because of unstated high entry fees, low profitability, weak chain growth, among others (Michael 2009;Sadeh and Kacker 2017), especially information referred to as objective facts, such as functional benefits. Therefore, there is an incentive to reveal information to franchisee candidates.…”

“…These certifications may assure prospective franchisees that they are dealing with businesses that have been acknowledged for their excellence when considering investment. More qualified franchisors should have no problem gaining certifications of quality (Sadeh and Kacker 2017) and, as achieving that recognition requires active effort, franchisors may be interested in signalling their accomplishments.…”