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Entrepreneurial signaling to attract resources: the case of franchising

  • Steven C. Michael

    (College of Business, University of Illinois Urbana Champaign, Champaign, IL, USA)

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    Why firms and individuals reveal information is the subject of considerable theoretical research, but little empirical work has been possible due to a lack of suitable data. In this paper we examine why entrepreneurs selling business opportunities (franchisors) reveal information regarding potential profits (termed earnings claims). Empirical analysis shows that: first, contrary to theory, only a small percentage of franchisors claim; and, second, the franchisors that do claim have lower costs or are responding to competition. In particular, the prediction of theoretical models from economics that resource providers will not transact if information is not disclosed is not supported; resource providers can and do make significant investments even when entrepreneurs refuse to disclose information. Copyright © 2009 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/mde.1460
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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 30 (2009)
    Issue (Month): 6 ()
    Pages: 405-422

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    Handle: RePEc:wly:mgtdec:v:30:y:2009:i:6:p:405-422
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Michael, Steven C. & Moore, Hollie J., 1995. "Returns to franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 133-155, October.
    2. Lafontaine, Francine & Bhattacharyya, Sugato, 1995. "The role of risk in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 39-74, October.
    3. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 471-501, October.
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    5. Janney, Jay J. & Folta, Timothy B., 2006. "Moderating effects of investor experience on the signaling value of private equity placements," Journal of Business Venturing, Elsevier, vol. 21(1), pages 27-44, January.
    6. Joseph Farrell, 1985. "Voluntary Disclosure: Robustness of the Unraveling Result, and Comments on Its Importance," Working papers 374, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Stiglitz, Joseph E., 2001. "Information and the Change in the Paradigm in Economics," Nobel Prize in Economics documents 2001-8, Nobel Prize Committee.
    8. Davila, Antonio & Foster, George & Gupta, Mahendra, 2003. "Venture capital financing and the growth of startup firms," Journal of Business Venturing, Elsevier, vol. 18(6), pages 689-708, November.
    9. Michael, Steven C., 1996. "To franchise or not to franchise: An analysis of decision rights and organizational form shares," Journal of Business Venturing, Elsevier, vol. 11(1), pages 57-71, January.
    10. Richard J. Gilbert and Marvin Lieberman., 1987. "Investment and Coordination in Oligopolistic Industries," Economics Working Papers 8730, University of California at Berkeley.
    11. Golan, Amos & Judge, George & Perloff, Jeffrey M, 1996. "Estimating the Size Distribution of Firms Using Government Summary Statistics," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 69-80, March.
    12. Kaufmann, Patrick J. & Dant, Rajiv P., 1999. "Franchising and the domain of entrepreneurship research," Journal of Business Venturing, Elsevier, vol. 14(1), pages 5-16, January.
    13. Caves, Richard E, 1986. "Information Structures of Product Markets," Economic Inquiry, Western Economic Association International, vol. 24(2), pages 195-212, April.
    14. Kaufmann, Patrick J., 1999. "Franchising and the choice of self-employment," Journal of Business Venturing, Elsevier, vol. 14(4), pages 345-362, July.
    15. Kwoka, John E, Jr, 1979. "The Effect of Market Share Distribution on Industry Performance," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 101-09, February.
    16. Janney, Jay J. & Folta, Timothy B., 2003. "Signaling through private equity placements and its impact on the valuation of biotechnology firms," Journal of Business Venturing, Elsevier, vol. 18(3), pages 361-380, May.
    17. Insuk Cheong & Jeong-Yoo Kim, 2004. "Costly Information Disclosure in Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 121-132, 03.
    18. Lafontaine, Francine, 1993. "Contractual Arrangements as Signaling Devices: Evidence from Franchising," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 256-89, October.
    19. Katz, Barbara G. & Joel Owen, 1992. "On the existence of franchise contracts and some of their implications," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 567-593, December.
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