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Franchising is commonly viewed as a source of expansion capital for small companies with "limited access to capital markets". Franchising, however, is used by many large, publicly traded companies. This paper summarizes the agency-cost explanation for why firms franchise and provides related empirical tests. In particular, the study extends existing empirical work on the cross-sectional determinants of the own versus franchise decision and provides new time series evidence on the valuation effects of franchise repurchases. The results support the agency explanation for franchising and suggest that there is a cost/benefit trade-off in deciding between owning versus franchising that faces the large as well as the small company.
Brickley et al. (Tue,) studied this question.
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