An empirical examination of capital markets, agency and brand name capital explanations for the existence of sub-franchising in the restaurant industry

This dissertation seeks to examine why some restaurant franchisors utilize sub-franchising agreements while others do not. The research was undertaken to explore issues of capital markets, agency and brand name capital explanations for the existence of sub-franchising in the restaurant industry. The main emphasis of this study is to ascertain whether sub-franchise contracts are used: (1) as a substitute for raising capital through public markets, (2) to mitigate agency costs between franchisors and franchisees, (3) to overcome a franchisor's unproven brand name capital.; The population of this study is drawn from individual franchisors in both the quick service and family style restaurant companies. Two samples were formed for these two groups. One was franchisors with sub-franchise contracts, the other was franchise companies without sub-franchise contracts.; Detailed methods for measuring the franchisor's capital constraints, monitoring costs, and brand name capital are explained. The hypotheses are tested using univariate and multiple logistic regression. The result of the hypothesis tests are mixed. The empirical evidence indicates that there is no statistically significant difference in a franchisor's ability to raise capital through the public markets for franchisors with and without sub-franchise contracts. However, organizational choices of franchisors (i.e., whether the franchisors enter into sub-franchising contracts or not) are consistent with agency and brand name capital explanations of franchising.; The existence of sub-franchising is viewed as an efficient approach given the agency cost considerations involved in franchising contracts. In particular, sub-franchising appears to be a mechanism to solve agency problems that arise from divergent goals between principal (franchisor) and the agent (franchisee). Additionally, the franchisor's weak brand name capital was found to be a significant factor in causing a franchisor to enter into sub-franchise contracts.