Size, growth rate and risk sharing as the determinants of propensity to franchise in chain restaurants

The purpose of this study is to identify the determinants of selected firms' characteristics that effect the proportion of company ownership and franchising in the chain restaurant industry. Size, growth rate as related to agency cost, brand name capital, and risk sharing arguments are proposed to explain why these financial measures are expected to differentiate the likelihood of franchising. To test these hypotheses, publicly held restaurant companies are examined. While previous research has focused on a narrow explanation for the existence of franchising, this study incorporates multiple prevailing theories to explain the proportion of franchised units to company-owned units. The study finds evidence that a restaurant's size, growth rate specifically related to monitoring costs, and risk sharing are important factors in determining the incremental use of the franchised units. On the other hand, despite predictions offered by existing literature, brand name capital is not as strong as an indicator of the mix of company-owned units and franchised units in the chain restaurants.