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.

Third-Party Signals in Crowdfunded Microfinance: The Role of Microfinance Institutions

“…Third-party signals are signals that arise from a signaler’s affiliation with other parties (Elitzur & Gavious, 2003; Dineen & Allen, 2016). Third-party signaling research examines how these affiliations act as a signal to communicate quality concerning the signaler (e.g., Gulati & Higgins, 2003; Sadeh & Kacker, 2018). An affiliation with a third party is an important signal because the third party possesses characteristics that can be used to make inferences about the signaler (e.g., Dineen & Allen, 2016; Gulati & Higgins, 2003; Sadeh & Kacker, 2018).…”

“…Third-party signaling research examines how these affiliations act as a signal to communicate quality concerning the signaler (e.g., Gulati & Higgins, 2003; Sadeh & Kacker, 2018). An affiliation with a third party is an important signal because the third party possesses characteristics that can be used to make inferences about the signaler (e.g., Dineen & Allen, 2016; Gulati & Higgins, 2003; Sadeh & Kacker, 2018). For example, when an investment bank has a track record of backing successful IPOs, an entrepreneur whose IPO is underwritten by this bank signals that his or her firm is a good investment.…”

“…Signaling theory contends that signals—deliberate communications of organizational attributes—are used to infer the quality of the signaler and make decisions when the receiver lacks insider information about the signaler (Connelly, Certo, Ireland, & Reutzel, 2011). Third-party signaling research examines how affiliations with other parties (e.g., strategic alliances, prominent investors, certification boards) act as signals to communicate the quality of the signaler (e.g., Gulati & Higgins, 2003; Sadeh & Kacker, 2018). Affiliations are key signals in that it is less costly for high-quality actors to establish third-party relations than it is for low-quality actors (Plummer, Allison, & Connelly, 2016; Spence, 1974).…”

The factors that determine franchising intensity: An analysis in an emerging economy

“…In other words, revealing valuable information reduces the asymmetry of information between the two parties. Before adhering to a franchise system, the franchisee needs information on the quality and cost of the franchise system, in aspects of performance such as experience, investment, profitability, geographical coverage, financial performance representations (FPR), among others (Dant & Kaufmann, 2003; Michael, 2009; Ozdemir & Kizildag, 2017; Sadeh & Kacker, 2018; Shane, Shankar, & Aravindakshan, 2006).…”

Franchising: a signaling perspective

“…Franchisees expect the franchisors to maintain high quality across the chain and extend timely support and training to operate their business units (Lucia-Palacios et al, 2014;Perrigot et al, 2017Perrigot et al, , 2020b. The rationale here is to combine the resources of both parties to gain a competitive advantage (Boulay et al, 2020;Rese, 2006;Sadeh and Kacker, 2018). Franchisors view franchising as a means of resource, growth and expansion, and franchisees perceive it as a safe business venture (Hodge et al, 2013).…”