IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v133y2021icp23-33.html
   My bibliography  Save this article

Are franchises really more viable? Evidence from loan defaults

Author

Listed:
  • Legendre, Nicolas
  • Nitani, Miwako
  • Riding, Allan

Abstract

This study examines whether franchisees are less likely to default on loans compared to counterpart independent SMEs. Findings from analyses of SME loan defaults between 2001 and 2015 suggest that franchisees, young and old, were just as likely to default than non-franchisee counterparts. The likelihood of loan default is higher for franchisees than for non-franchisees for those with high debt burdens. While default rates vary by sector, these findings are robust to sector-specific estimations and alternative time horizons of default. Findings suggest that the benefits of the franchising model, such as new firms acquiring the franchisors’ brand name, do not necessarily lead to lower default rates for franchisees. Overall, this study finds evidence questioning the proposition that franchising is a relatively less risky form of business organization for prospective entrepreneurs.

Suggested Citation

  • Legendre, Nicolas & Nitani, Miwako & Riding, Allan, 2021. "Are franchises really more viable? Evidence from loan defaults," Journal of Business Research, Elsevier, vol. 133(C), pages 23-33.
    • Handle: RePEc:eee:jbrese:v:133:y:2021:i:c:p:23-33
    DOI: 10.1016/j.jbusres.2021.04.051
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148296321002897
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbusres.2021.04.051?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bates, Timothy, 1998. "Survival patterns among newcomers to franchising," Journal of Business Venturing, Elsevier, vol. 13(2), pages 113-130, March.
    2. Mourifié, Ismael & Méango, Romuald, 2014. "A note on the identification in two equations probit model with dummy endogenous regressor," Economics Letters, Elsevier, vol. 125(3), pages 360-363.
    3. Sukjin Han & Sungwon Lee, 2019. "Estimation in a generalization of bivariate probit models with dummy endogenous regressors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(6), pages 994-1015, September.
    4. Pankaj C. Patel & John A. Pearce II, 2020. "Franchisees and Loan Default on Third-Party Guarantee Loans: Evidence From the United States," Entrepreneurship Theory and Practice, , vol. 44(5), pages 861-877, September.
    5. Baldwin, John R. & Rafiquzzaman, Mohammed, 1995. "Selection versus evolutionary adaptation: Learning and post-entry performance," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 501-522, December.
    6. Salvatore Zecchini & Marco Ventura, 2009. "The impact of public guarantees on credit to SMEs," Small Business Economics, Springer, vol. 32(2), pages 191-206, February.
    7. Cowan, Kevin & Drexler, Alejandro & Yañez, Álvaro, 2015. "The effect of credit guarantees on credit availability and delinquency rates," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 98-110.
    8. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    9. Honohan, Patrick, 2010. "Partial credit guarantees: Principles and practice," Journal of Financial Stability, Elsevier, vol. 6(1), pages 1-9, April.
    10. Alicia M. Robb & David T. Robinson, 2014. "The Capital Structure Decisions of New Firms," The Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 153-179, January.
    11. Frazer, Lorelle & Winzar, Hume, 2005. "Exits and expectations: why disappointed franchisees leave," Journal of Business Research, Elsevier, vol. 58(11), pages 1534-1542, November.
    12. Andy Cosh & Douglas Cumming & Alan Hughes, 2009. "Outside Enterpreneurial Capital," Economic Journal, Royal Economic Society, vol. 119(540), pages 1494-1533, October.
    13. Holmberg, Stevan R. & Morgan, Kathryn Boe, 2003. "Franchise turnover and failure: New research and perspectives," Journal of Business Venturing, Elsevier, vol. 18(3), pages 403-418, May.
    14. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    15. Denise M. Cumberland & William R. Meek & Richard Germain, 2015. "Entrepreneurial Self-Efficacy And Firm Performance In Challenging Environments: Evidence From The Franchise Context," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-19.
    16. Scott Shane & Maw-Der Foo, 1999. "New Firm Survival: Institutional Explanations for New Franchisor Mortality," Management Science, INFORMS, vol. 45(2), pages 142-159, February.
    17. Kahle, Kathleen M. & Stulz, René M., 2013. "Access to capital, investment, and the financial crisis," Journal of Financial Economics, Elsevier, vol. 110(2), pages 280-299.
    18. Humphreys, Brad & Nyman, John & Ruseski, Jane, 2011. "The Effect of Gambling on Health: Evidence from Canada," Working Papers 2011-18, University of Alberta, Department of Economics.
    19. Lafontaine, Francine & Shaw, Kathryn L., 1998. "Franchising growth and franchisor entry and exit in the U.S. market: Myth and reality," Journal of Business Venturing, Elsevier, vol. 13(2), pages 95-112, March.
    20. Han, Sukjin & Vytlacil, Edward J., 2017. "Identification in a generalization of bivariate probit models with dummy endogenous regressors," Journal of Econometrics, Elsevier, vol. 199(1), pages 63-73.
    21. Pierre Azoulay & Scott Shane, 2001. "Entrepreneurs, Contracts, and the Failure of Young Firms," Management Science, INFORMS, vol. 47(3), pages 337-358, March.
    22. Mingfeng Lin & Henry C. Lucas & Galit Shmueli, 2013. "Research Commentary ---Too Big to Fail: Large Samples and the p -Value Problem," Information Systems Research, INFORMS, vol. 24(4), pages 906-917, December.
    23. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nitani, Miwako & Legendre, Nicolas, 2021. "Cooperative lenders and the performance of small business loans," Journal of Banking & Finance, Elsevier, vol. 128(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Esther Calderon-Monge & Ivan Pastor-Sanz & Pilar Huerta-Zavala, 2017. "Economic Sustainability in Franchising: A Model to Predict Franchisor Success or Failure," Sustainability, MDPI, vol. 9(8), pages 1-16, August.
    2. Andrew Eckert & Douglas West, 2008. "Firm Survival and Chain Growth in a Privatized Retail Liquor Store Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(1), pages 1-18, February.
    3. Vanesa Solís-Rodríguez & Manuel González-Díaz, 2017. "Differences in contract design between successful and less successful franchises," European Journal of Law and Economics, Springer, vol. 44(3), pages 483-502, December.
    4. Nitani, Miwako & Legendre, Nicolas, 2021. "Cooperative lenders and the performance of small business loans," Journal of Banking & Finance, Elsevier, vol. 128(C).
    5. S. Verbieren & M. Cools & A. Van den Abbeele, 2008. "Franchising. A Literature Review on Management and Control Issues," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 398-443.
    6. Peter Hennecke & Doris Neuberger & Dirk Ulbricht, 2019. "The economic and fiscal benefits of guarantee banks in Germany," Small Business Economics, Springer, vol. 53(3), pages 771-794, October.
    7. Lina Zhang & David T. Frazier & D. S. Poskitt & Xueyan Zhao, 2020. "Decomposing Identification Gains and Evaluating Instrument Identification Power for Partially Identified Average Treatment Effects," Papers 2009.02642, arXiv.org, revised Sep 2022.
    8. Rodrigo Martín-García & Jorge Morán Santor, 2021. "Public guarantees: a countercyclical instrument for SME growth. Evidence from the Spanish Region of Madrid," Small Business Economics, Springer, vol. 56(1), pages 427-449, January.
    9. Hennecke, Peter & Neuberger, Doris & Ulbricht, Dirk, 2017. "The economic and fiscal value of German guarantee banks," Thuenen-Series of Applied Economic Theory 152, University of Rostock, Institute of Economics.
    10. Santiago Acerenza & Otávio Bartalotti & Désiré Kédagni, 2023. "Testing identifying assumptions in bivariate probit models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(3), pages 407-422, April.
    11. Angelo Castaldo & Rosanna Pittiglio & Filippo Reganati & Domenico Sarno, 2023. "Access to bank financing and start‐up resilience: A survival analysis across business sectors in a time of crisis," Manchester School, University of Manchester, vol. 91(3), pages 141-170, June.
    12. Gary Castrogiovanni & Robert Justis, 2007. "Franchise failure: a reassessment of the Bates (1995) results," Service Business, Springer;Pan-Pacific Business Association, vol. 1(3), pages 247-256, September.
    13. Paul Tracey & Owen Jarvis, 2007. "Toward a Theory of Social Venture Franchising," Entrepreneurship Theory and Practice, , vol. 31(5), pages 667-685, September.
    14. Perrigot, Rozenn & López-Fernández, Begoña & Basset, Guy, 2020. "“Conflict-performance assumption†or “performance-conflict assumption†: Insights from franchising," Journal of Retailing and Consumer Services, Elsevier, vol. 55(C).
    15. Melih Madanoglu & Gary J. Castrogiovanni, 2018. "Franchising proportion and network failure," Small Business Economics, Springer, vol. 50(4), pages 697-715, April.
    16. Cowling, Marc & Ughetto, Elisa & Lee, Neil, 2018. "The innovation debt penalty: Cost of debt, loan default, and the effects of a public loan guarantee on high-tech firms," Technological Forecasting and Social Change, Elsevier, vol. 127(C), pages 166-176.
    17. Cumming, Douglas & Deloof, Marc & Manigart, Sophie & Wright, Mike, 2019. "New directions in entrepreneurial finance," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 252-260.
    18. Magnus Schückes & Tobias Gutmann, 2021. "Why do startups pursue initial coin offerings (ICOs)? The role of economic drivers and social identity on funding choice," Small Business Economics, Springer, vol. 57(2), pages 1027-1052, August.
    19. Anjana Susarla & Anitesh Barua, 2011. "Contracting Efficiency and New Firm Survival in Markets Enabled by Information Technology," Information Systems Research, INFORMS, vol. 22(2), pages 306-324, June.
    20. Erel, Isil & Jang, Yeejin & Minton, Bernadette A. & Weisbach, Michael S., 2021. "Corporate Liquidity, Acquisitions, and Macroeconomic Conditions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(2), pages 443-474, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:133:y:2021:i:c:p:23-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.