Small Business Economics

, Volume 50, Issue 4, pp 729–748 | Cite as

Quality signaling through ex-ante voluntary information disclosure in entrepreneurial networks: evidence from franchising

  • Farhad SadehEmail author
  • Manish Kacker


This paper examines antecedents of ex-ante voluntary information disclosures for standardized contracts in entrepreneurial networks. Entrepreneurs (e.g., franchisors) may make such disclosures to prospective business partners in order to signal profitability of partnering, attract financial and managerial resources, and develop their entrepreneurial networks. In practice, only a fraction of franchisors make financial performance representations (FPRs), an ex-ante voluntary information disclosure to prospective franchisees. We address gaps in the signaling, voluntary information disclosure, franchising, entrepreneurship, and small- and medium-enterprise (SME) literatures. We draw on signaling theory to develop a theoretical framework and investigate factors that influence a franchisor’s disclosure decision. We evaluate hypotheses from our theoretical framework through econometric analyses of multi-sector panel data for the US franchising industry. We estimate a logit model and use lagged independent variables to address our dichotomous independent variable and potential endogeneity, respectively. Our results support the view that firms signal their quality through FPRs to attract potential business partners and expand their entrepreneurial networks. Beyond the extant literature, we find that rigorous partner qualification is another driver of voluntary information disclosure in franchising. Our findings also provide empirical support for the complementary role played by multiple quality signaling mechanisms used by franchisors and yield public policy implications for franchising.


Franchising Contracting Voluntary information disclosure Entrepreneurship Signaling Financial performance representations 

JEL classifications

L14 L26 D22 K23 M38 


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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.DeGroote School of BusinessMcMaster UniversityHamiltonCanada

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