Franchising and firm risk among restaurants

Abstract Franchising is a growth vehicle that helps firms scale their operations. Yet, the performance implications of franchising remain inconclusive. To solve this conundrum, we contend that firm-specific attributes lead to an optimal level of franchising and that the deviation from that optimal level has important firm-level consequences. Using a sample of 64 publicly listed restaurant firms that franchise in the United States, our study integrates the risk sharing perspective with resource scarcity and agency theories to show that a failure to adhere to these theoretical prescriptions can be a financially risky proposition. For restaurant firms that franchise, our results highlight the importance of maintaining an optimal mix of franchised and firm-owned outlets.