How Do Franchise Ownership Structure and Strategic Investment Emphasis Influence Stock Returns and Risks?

- Investors respond to franchisors' ownership structure and investment emphasis.
- We assess the impact of these two strategic decisions on stock returns and risks.
- A higher proportion of franchised units has lower stock returns and risk.
- The emphasis on intangible assets investment has higher stock returns and risk.
- The interaction between two decisions exists when firms franchise internationally.

Franchisors seek to maximize firm value by managing investments both in tangible and intangible assets and in the mix of company and franchised outlets, yet little is known about how investors respond to shifts in these strategic decisions. Our goal is to assess the impact of these decisions on shareholder value within franchise systems through panel-data models. Specifically, we provide evidence on how investors in publicly traded franchises evaluate both the ownership structure and the strategic investment emphasis between intangible assets (e.g., brand) and tangible assets (e.g., plant and property). We find that an increase in the proportion of franchised units is negatively associated both with stock returns and idiosyncratic risk. In contrast, an increase in the emphasis on strategic investments in intangible assets is positively associated both with stock returns and idiosyncratic risk. Moreover, strategic investment emphasis moderates the strength of the effect of franchise ownership structure when firms franchise internationally. Overall, this research provides a novel empirical examination of franchising economics and has managerial implications for franchised channel structure.

190Underlying mechanism between market-based assets and firm value (Srivastava, Shervani, and Fahey 1998).