Evidence of Franchising on Outperformance in the Restaurant Industry: A Long Term Analysis and Perspective

Keywords

Financial performance, Franchising, Restaurant franchising, Restaurant industry, Hospitality services

Abstract

Purpose– The existing research finds a positive financial impact of franchising for relatively short time windows, usually less than ten years. As a result, these studies leave one critical research question unanswered: does franchising influence restaurant firms' financial performance consistently in the long term? The purpose of this paper is to address the research question and offer relevant managerial implications. Design/methodology/approach– This study uses and expands the models derived from Ohlson, from Amir and Lev and from Lev and Zarowin to address the financial impacts of franchise in the restaurant industry from a long-term and consistent perspective. Findings– Carrying out empirical tests over all ten-year testing windows that span 1980-2010 with quarterly data, this study finds that franchising is an effective mechanism to systematically and consistently outperform non-franchise firms in the long term and provides compelling empirical evidence to answer the research question. Further, limited-service restaurants also exhibit consistent and positive impacts on firm financial performance in the long term, suggesting limited-service operations are also effective to enhance firm value and outperform competitors. Originality/value– First, this study expands the set of variables employed by many financial researchers to explain stock price in the restaurant industry. Second, this study tests and shows that franchising systematically leads to financial outperformance over the long term. Third, this study tests and shows that limited service restaurants consistently and systematically outperform their peers in the long run. Finally, the results of this study can be used to help investors and fund managers select restaurant company stocks and offer compelling evidence in support of franchising and limited service operations.

Publication Date

6-1-2013

Original Citation

Hua Nan , C. Dalbor Michael , (2013) "Evidence of franchising on outperformance in the restaurant industry: A long term analysis and perspective", International Journal of Contemporary Hospitality Management, Vol. 25 Iss: 5, pp.723 - 739

Number of Pages

723-739

Document Type

Paper

Language

English

Source Title

International Journal of Contemporary Hospitality Management

Volume

25

Issue

5

College

Rosen College of Hospitality Management

Location

Rosen College of Hospitality Management

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