Impacts of Refranchising.

• In Event: Monitoring, Executive Compensation, and CEO Turnover

Abstract

Franchising is an important form of management control. Possible benefits of franchising include the ability to reduce agency costs that increase with costly monitoring, and to provide incentives for the use of local information by on-site managers. However, these benefits may come at a cost, as franchisees may reduce quality by choosing to free ride. Many studies have investigated the reasons for franchising, but few studies have documented the impacts of franchising on unit-level operating performance. Using time-series data from a number of lodging properties that were converted to franchisee control from company control, this study documents the performance impacts of franchising. Our analysis reveals that conversion to franchisee control results in a modest decline in revenues and an immediate, sharp decline in quality. The study then documents that the magnitude of revenue and quality gains are contingent on factors that proxy for the franchisor’s monitoring costs and the degree to which the property can benefit from local decision-making authority.

Authors

• James W Hesford, University of Lethbridge

• Mina Pizzini, Texas State University - San Marcos

• Gordon S Potter, Cornell University