Advertisement

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 Sadeh
  • Manish Kacker
Article

Abstract

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.

Keywords

Franchising Contracting Voluntary information disclosure Entrepreneurship Signaling Financial performance representations 

JEL classifications

L14 L26 D22 K23 M38 

References

  1. Akerlof, G. (1970). The market for lemons: quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500.CrossRefGoogle Scholar
  2. Aldrich, H., & Auster, E. R. (1986). Even dwarfs started small: liabilities of age and size and their strategic implications. In B. M. Staw & L. L. Cummings (Eds.), Research in organizational behavior (Vol. 8, pp. 165–186). Greenwich: JAI Press.Google Scholar
  3. Antia, K. D., Zheng, X., & Frazier, G. L. (2013). Conflict management and outcomes in franchise relationships: the role of regulation. Journal of Marketing Research, 50(5), 577–589. doi: 10.1509/jmr.11.0144.CrossRefGoogle Scholar
  4. Armstrong, J., Brodie, R., & Parsons, A. (2001). Hypotheses in marketing science: literature review and publication audit. Marketing Letters, 12(2), 171–187. doi: 10.1023/A:1011169104290.CrossRefGoogle Scholar
  5. Arthurs, J. D., Busenitz, L. W., Hoskisson, R. E., & Johnson, R. A. (2009). Signaling and initial public offerings: the use and impact of the lockup period. Journal of Business Venturing, 24(4), 360–372. doi: 10.1016/j.jbusvent.2008.02.004.CrossRefGoogle Scholar
  6. Asoni, A., & Sanandaji, T. (2016). Identifying the effect of college education on business and employment survival. Small Business Economics, 46(2), 311–324. doi: 10.1007/s11187-015-9686-5.CrossRefGoogle Scholar
  7. Backes-Gellner, U., & Werner, A. (2007). Entrepreneurial signaling via education: a success factor in innovative start-ups. Small Business Economics, 29(1), 173–190. doi: 10.1007/s11187-006-0016-9.CrossRefGoogle Scholar
  8. Bagwell, K., & Riordan, M. H. (1991). High and declining prices signal product quality. American Economic Review, 81(1), 224–239.Google Scholar
  9. Baltagi, B. (2008). Econometric analysis of panel data. Hoboken: Wiley.Google Scholar
  10. Barthélemy, J. (2008). Opportunism, knowledge, and the performance of franchise chains. Strategic Management Journal, 29(13), 1451–1463. doi: 10.1002/smj.719.CrossRefGoogle Scholar
  11. Bates, T. (1995). A comparison of franchise and independent small business survival rates. Small Business Economics, 7(5), 377–388.CrossRefGoogle Scholar
  12. Benoliel, U. (2017). Are Disclosures Really Standardized? An Empirical Analysis. Villanova Law Review, 62, 1–26.Google Scholar
  13. Blair, R. D., & Lafontaine, F. (2005). The economics of franchising. New York: Cambridge University Press.CrossRefGoogle Scholar
  14. Brickley, J. A., Misra, S., & Van Horn, R. L. (2006). Contract duration: evidence from franchising. Journal of Law and Economics, 49(1), 173–196. doi: 10.1086/501081.CrossRefGoogle Scholar
  15. Calderon-Monge, E., & Huerta-Zavala, P. (2014). Brand and performance signals in the choice of franchise opportunities. The Service Industries Journal, 34(9–10), 772–787. doi: 10.1080/02642069.2014.905920.CrossRefGoogle Scholar
  16. Certo, S. T., Daily, C. M., & Dalton, D. R. (2001). Signaling firm value through board structure: an investigation of initial public offerings. Entrepreneurship Theory and Practice, 26(2), 33–50.CrossRefGoogle Scholar
  17. Chamberlin, T. C. (1897). Studies for students: the method of multiple working hypotheses. The Journal of Geology, 5(8), 837–848. doi: 10.2307/30054868.CrossRefGoogle Scholar
  18. Cheong, I., & Kim, J. Y. (2004). Costly information disclosure in oligopoly. The Journal of Industrial Economics, 52(1), 121–132. doi: 10.1111/j.0022-1821.2004.00218.x.CrossRefGoogle Scholar
  19. Chow, C. W., & Wong-Boren, A. (1987). Voluntary financial disclosure by Mexican corporations. The Accounting Review, 62(3), 533–541.Google Scholar
  20. Chung, W., & Kalnins, A. (2001). Agglomeration effects and performance: a test of the Texas lodging industry. Strategic Management Journal, 22(10), 969–988. doi: 10.1002/smj.178.CrossRefGoogle Scholar
  21. Clarkin, J. E., & Rosa, P. J. (2005). Entrepreneurial teams within franchise firms. International Small Business Journal, 23(3), 303–334. doi: 10.1177/0266242605052075.CrossRefGoogle Scholar
  22. Combs, J. G., Michael, S. C., & Castrogiovanni, G. J. (2009). Institutional influences on the choice of organizational form: the case of franchising. Journal of Management. doi: 10.1177/0149206309336883.
  23. Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: a review and assessment. Journal of Management, 37(1), 39–67. doi: 10.1177/0149206310388419.CrossRefGoogle Scholar
  24. Crocker, K. J., & Masten, S. E. (1988). Mitigating contractual hazards: unilateral options and contract length. The Rand Journal of Economics, 19(3), 327–343. doi: 10.2307/2555660.CrossRefGoogle Scholar
  25. Diamond, D. W. (1985). Optimal release of information by firms. The Journal of Finance, 40(4), 1071–1094. doi: 10.2307/2328395.CrossRefGoogle Scholar
  26. Dye, R. A. (1985). Strategic accounting choice and the effects of alternative financial reporting requirements. Journal of Accounting Research, 23(2), 544–574. doi: 10.2307/2490826.CrossRefGoogle Scholar
  27. Fadairo, M., & Lanchimba, C. (2013). Signaling the quality of a business concept; Evidence from a structural equations model with Brazilian data. Paper presented at the 40th Annual Conference of the European Association for Research in Industrial Economics.Google Scholar
  28. Filatotchev, I., & Bishop, K. (2002). Board composition, share ownership, and ‘underpricing’ of U.K. IPO firms. Strategic Management Journal, 23(10), 941–955. doi: 10.1002/smj.269.CrossRefGoogle Scholar
  29. Gallini, N. T., & Lutz, N. A. (1992). Dual distribution and royalty fees in franchising. Journal of Law, Economics, and Organization, 471–501.Google Scholar
  30. Gao, H., Darroch, J., Mather, D., & MacGregor, A. (2008). Signaling corporate strategy in IPO communication a study of biotechnology IPOs on the NASDAQ. Journal of Business Communication, 45(1), 3–30. doi: 10.1177/0021943607309349.CrossRefGoogle Scholar
  31. Gillis, W. E., Combs, J. G., & Ketchen, D. J. (2014). Using resource-based theory to help explain plural form franchising. Entrepreneurship Theory and Practice, 38(3), 449–472. doi: 10.1111/etap.12008.CrossRefGoogle Scholar
  32. Golan, A., Judge, G., & Perloff, J. M. (1996). Estimating the size distribution of firms using government summary statistics. The Journal of Industrial Economics, 44, 69–80. doi: 10.2307/2950561.CrossRefGoogle Scholar
  33. Gonzalez-Diaz, M., & Solis-Rodriguez, V. (2012). Why do entrepreneurs use franchising as a financial tool? An agency explanation. Journal of Business Venturing, 27(3), 325–341. doi: 10.1016/j.jbusvent.2011.03.001.CrossRefGoogle Scholar
  34. Grossman, S. J. (1981). The informational role of warranties and private disclosure about product quality. Journal of Law and Economics, 24, 461–483.CrossRefGoogle Scholar
  35. Grünhagen, M., & Dorsch, M. J. (2003). Does the franchisor provide value to franchisees? Past, current, and future value assessments of two franchisee types. Journal of Small Business Management, 41(4), 366–384. doi: 10.1111/1540-627X.00088.CrossRefGoogle Scholar
  36. Guilloux, V., Gauzente, C., Kalika, M., & Dubost, N. (2004). How France’s potential franchisees reach their decisions: a comparison with franchisers’ perceptions. Journal of Small Business Management, 42(2), 218–224. doi: 10.1111/j.1540-627X.2004.00107.x.CrossRefGoogle Scholar
  37. Hayes, A. F., & Krippendorff, K. (2007). Answering the call for a standard reliability measure for coding data. Communication Methods and Measures, 1(1), 77–89. doi: 10.1080/19312450709336664.CrossRefGoogle Scholar
  38. Hendrikse, G., & Windsperger, J. (2011). Determinants of contractual completeness in franchising. In M. Tuunanen, G. Cliquet, G. Hendrikse, & J. Windsperger (Eds.), New developments in the theory of networks (pp. 13–30). Heidelberg: Physica-Verlag.CrossRefGoogle Scholar
  39. Hendrikse, G., Hippmann, P., & Windsperger, J. (2015). Trust, transaction costs and contractual incompleteness in franchising. Small Business Economics, 44(4), 867–888. doi: 10.1007/s11187-014-9626-9.CrossRefGoogle Scholar
  40. Hershman, S., & Mazero, J. G. (2008). Financial performance representations: the new and updated earnings claims (1st ed.). Illinois: American Bar Association.Google Scholar
  41. Honig, B., Lampel, J., Siegel, D., & Drnevich, P. (2014). Ethics in the production and dissemination of management research: institutional failure or individual fallibility? Journal of Management Studies, 51(1), 118–142. doi: 10.1111/joms.12056.CrossRefGoogle Scholar
  42. Hsiao, C. (2014). Analysis of panel data (3rd ed.). New York: Cambridge university press.CrossRefGoogle Scholar
  43. Hsieh, C., Lazzarini, S. G., Nickerson, J. A., & Laurini, M. (2010). Does ownership affect the variability of the production process? Evidence from international courier services. Organization Science, 21(4), 892–912. doi: 10.1287/orsc.l090.0482.CrossRefGoogle Scholar
  44. Hubbard, R., Vetter, D. E., & Little, E. L. (1998). Replication in strategic management: scientific testing for validity, generalizability, and usefulness. Strategic Management Journal, 19(3), 243–254. doi: 10.1002/(SICI)1097-0266(199803)19:3<243::AID-SMJ951>3.0.CO;2-0.CrossRefGoogle Scholar
  45. IHS-Economics. (2016). Franchise business economic outlook for 2016: International Franchise Association Educational Foundation. Google Scholar
  46. Janney, J. J., & Folta, T. B. (2006). Moderating effects of investor experience on the signaling value of private equity placements. Journal of Business Venturing, 21(1), 27–44. doi: 10.1016/j.jbusvent.2005.02.008.CrossRefGoogle Scholar
  47. Justis, R. T., & Chan, P. S. (1991). Training for franchise management. Journal of Small Business Management, 29(3), 87.Google Scholar
  48. Kacker, M., & Wu, R. (2013). Specific investments in franchisor–franchisee relationships: a model. Journal of Marketing Channels, 20(1–2), 120–140. doi: 10.1080/1046669X.2013.747863.CrossRefGoogle Scholar
  49. Kacker, M., Dant, R. P., Emerson, J., & Coughlan, A. T. (2016). How firm strategies impact size of partner-based retail networks: evidence from franchising. Journal of Small Business Management, 54(2), 506–531. doi: 10.1111/jsbm.12155.CrossRefGoogle Scholar
  50. Kaufmann, D. (1995). The case against mandatory earnings claim disclosure. Franchise Law Journal, 15(1), 3.Google Scholar
  51. Kaufmann, P. J., & Dant, R. P. (2001). The pricing of franchise rights. Journal of Retailing, 77(4), 537–545. doi: 10.1016/S0022-4359(01)00053-7.CrossRefGoogle Scholar
  52. Keasey, K., Short, H., & McGuinness, P. (1992). New issues on the U.K. unlisted securities market: the ability of entrepreneurs to signal firm value. Small Business Economics, 4(1), 15–27. doi: 10.1007/bf00402212.Google Scholar
  53. Kirmani, A., & Rao, A. R. (2000). No pain, no gain: a critical review of the literature on signaling unobservable product quality. Journal of Marketing, 64(2), 66–79. doi: 10.1509/jmkg.64.2.66.18000.CrossRefGoogle Scholar
  54. Kosová, R., & Lafontaine, F. (2010). Survival and growth in retail and service industries: evidence from franchised chains. The Journal of Industrial Economics, 58(3), 542–578. doi: 10.1111/j.1467-6451.2010.00431.x.CrossRefGoogle Scholar
  55. Kwoka, J. E. (1979). The effect of market share distribution on industry performance. The Review of Economics and Statistics, 61, 101–109. doi: 10.2307/1924836.CrossRefGoogle Scholar
  56. Lafontaine, F. (1992). Agency theory and franchising: some empirical results. The Rand Journal of Economics, 23(2), 263–283. doi: 10.2307/2555988.CrossRefGoogle Scholar
  57. Lafontaine, F. (1993). Contractual arrangements as signaling devices: evidence from franchising. Journal of Law, Economics, and Organization, 256–289.Google Scholar
  58. Lafontaine, F., & Blair, R. D. (2009). The evolution of franchising and franchise contracts: evidence from the United States. Entrepreneurial Business Law Journal, 3(2), 381–434.Google Scholar
  59. Lafontaine, F., & Shaw, K. L. (1998). Franchising growth and franchisor entry and exit in the US market: myth and reality. Journal of Business Venturing, 13(2), 95–112. doi: 10.1016/S0883-9026(97)00065-7.CrossRefGoogle Scholar
  60. Lafontaine, F., & Shaw, K. L. (1999). The dynamics of franchise contracting: evidence from panel data. Journal of Political Economy, 107(5), 1041–1080. doi: 10.3386/w5585.CrossRefGoogle Scholar
  61. Lafontaine, F., & Shaw, K. L. (2005). Targeting managerial control: evidence from franchising. RAND Journal of Economics, 36(1), 131–150. doi: 10.2307/1593758.Google Scholar
  62. Lardon, A., & Deloof, M. (2014). Financial disclosure by SMEs listed on a semi-regulated market: evidence from the Euronext free market. Small Business Economics, 42(2), 361–385. doi: 10.1007/s11187-013-9484-x.CrossRefGoogle Scholar
  63. Lee, P. M. (2001). What’s in a name. Com?: the effects of ‘. com’name changes on stock prices and trading activity. Strategic Management Journal, 22(8), 793–804. doi: 10.1002/smj.177.CrossRefGoogle Scholar
  64. Leland, H. E., & Pyle, D. H. (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of Finance, 32(2), 371–387. doi: 10.2307/2326770.CrossRefGoogle Scholar
  65. López-Bayón, S., & González-Díaz, M. (2010). Indefinite contract duration: evidence from electronics subcontracting. International Review of Law and Economics, 30(2), 145–159. doi: 10.1016/j.irle.2010.03.001.CrossRefGoogle Scholar
  66. Luangsuvimol, T., & Kleiner, B. H. (2004). Effective franchise management. Management Research News, 27(4/5), 63–71. doi: 10.1108/01409170410784482.CrossRefGoogle Scholar
  67. Lucia-Palacios, L., Bordonaba-Juste, V., Madanoglu, M., & Alon, I. (2014). Franchising and value signaling. Journal of Services Marketing, 28(2), 105–115. doi: 10.1108/JSM-09-2013-0253.CrossRefGoogle Scholar
  68. Michael, S. C. (1999). The elasticity of franchising. Small Business Economics, 12(4), 313–320. doi: 10.1023/A:1008019418231.CrossRefGoogle Scholar
  69. Michael, S. C. (2000). The effect of organizational form on quality: the case of franchising. Journal of Economic Behavior and Organization, 43(3), 295–318. doi: 10.1016/S0167-2681(00)00125-6.CrossRefGoogle Scholar
  70. Michael, S. C. (2003). First mover advantage through franchising. Journal of Business Venturing, 18(1), 61–80. doi: 10.1016/S0883-9026(01)00085-4.CrossRefGoogle Scholar
  71. Michael, S. C. (2009). Entrepreneurial signaling to attract resources: the case of franchising. Managerial and Decision Economics, 30(6), 405–422. doi: 10.1002/mde.1460.CrossRefGoogle Scholar
  72. Michael, S. (2014). Can franchising be an economic development strategy? An empirical investigation. Small Business Economics, 42(3), 611–620. doi: 10.1007/s11187-013-9500-1.CrossRefGoogle Scholar
  73. Milgrom, P. (1981). Good news and bad news: representation theorems and applications. The Bell Journal of Economics, 12(2), 380–391. doi: 10.2307/3003562.CrossRefGoogle Scholar
  74. Milgrom, P., & Roberts, J. (1986). Price and advertising signals of product quality. Journal of Political Economy, 94(4), 796–821. doi: 10.1086/261408.CrossRefGoogle Scholar
  75. Mishra, D. P., Heide, J. B., & Cort, S. G. (1998). Information asymmetry and levels of agency relationships. Journal of Marketing Research, 35(3), 277–295. doi: 10.2307/3152028.CrossRefGoogle Scholar
  76. Mitsuhashi, H., Shane, S., & Sine, W. D. (2008). Organization governance form in franchising: efficient contracting or organizational momentum? Strategic Management Journal, 29(10), 1127–1136. doi: 10.1002/smj.702.CrossRefGoogle Scholar
  77. Montiel, I., Husted, B. W., & Christmann, P. (2012). Using private management standard certification to reduce information asymmetries in corrupt environments. Strategic Management Journal, 33(9), 1103–1113. doi: 10.1002/smj.1957.CrossRefGoogle Scholar
  78. Nelson, P. (1970). Information and consumer behavior. Journal of Political Economy, 78(2), 311–329. doi: 10.1086/259630.CrossRefGoogle Scholar
  79. Perrigot, R. (2006). Services vs retail chains: are there any differences? International Journal of Retail & Distribution Management, 34(12), 918–930. doi: 10.1108/09590550610714648.CrossRefGoogle Scholar
  80. Platt, J. R. (1964). Strong inference: certain systematic methods of scientific thinking may produce much more rapid progress than others. Science, 146, 347–353.CrossRefGoogle Scholar
  81. Price, R. (2000). Who reports earnings when reporting is optional? The market for new franchises. Journal of Accounting and Economics, 28(3), 391–423. doi: 10.1016/S0165-4101(00)00009-4.CrossRefGoogle Scholar
  82. Riley, J. G. (1975). Competitive signaling. Journal of Economic Theory, 10(2), 174–186. doi: 10.1016/0022-0531(75)90049-6.CrossRefGoogle Scholar
  83. Rostamkalaei, A., & Freel, M. (2016). The cost of growth: small firms and the pricing of bank loans. Small Business Economics, 46(2), 255–272. doi: 10.1007/s11187-015-9681-x.CrossRefGoogle Scholar
  84. Sen, K. C. (1993). The use of initial fees and royalties in business-format franchising. Managerial and Decision Economics, 14(2), 175–190. doi: 10.1002/mde.4090140209.CrossRefGoogle Scholar
  85. Seshadri, S. (2002). Outlet ownership in franchising systems: an agency based approach. Managerial and Decision Economics, 23(6), 355–369. doi: 10.1002/mde.1073.CrossRefGoogle Scholar
  86. Shane, S. (1998). Research notes and communications: making new franchise systems work. Strategic Management Journal, 19(7), 697–707. doi: 10.1002/(SICI)1097-0266(199807)19:7<697.CrossRefGoogle Scholar
  87. Shane, S., Shankar, V., & Aravindakshan, A. (2006). The effects of new franchisor partnering strategies on franchise system size. Management Science, 52(5), 773–787. doi: 10.1287/mnsc.1050.0449.CrossRefGoogle Scholar
  88. Sorenson, O., & Sorensen, J. B. (2001). Finding the right mix: franchising, organizational learning, and chain performance. Strategic Management Journal, 22(6/7), 713–724. doi: 10.1002/smj.185.CrossRefGoogle Scholar
  89. Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355–374.CrossRefGoogle Scholar
  90. Spence, M. (2002). Signaling in retrospect and the informational structure of markets. American Economic Review, 92(3), 434–459. doi: 10.1257/00028280260136200.CrossRefGoogle Scholar
  91. Srinivasan, R., & Sihi, D. (2012). Marketing information disclosures: a review and research agenda. In S. Ganesan (Ed.), Handbook of marketing and finance (pp. 108–126). Cheltenham: Edward Edgar Publishing Limited.Google Scholar
  92. Stanworth, J., & Kaufmann, P. (1996). Similarities and differences in UK and US franchise research data: towards a dynamic model of franchisee motivation. International Small Business Journal, 14(3), 57–70. doi: 10.1177/0266242696143003.CrossRefGoogle Scholar
  93. Strotmann, H. (2007). Entrepreneurial survival. Small Business Economics, 28(1), 87–104. doi: 10.1007/s11187-005-8859-z.CrossRefGoogle Scholar
  94. Stump, R. L., & Heide, J. B. (1996). Controlling supplier opportunism in industrial relationships. Journal of Marketing Research, 33(4), 431–441. doi: 10.2307/3152214.CrossRefGoogle Scholar
  95. Terlaak, A. (2007). Order without law? The role of certified management standards in shaping socially desired firm behaviors. The Academy of Management Review, 32(3), 968–985. doi: 10.2307/20159344.CrossRefGoogle Scholar
  96. Tsang, E. W. K., & Kwan, K.-M. (1999). Replication and theory development in organizational science: a critical realist perspective. The Academy of Management Review, 24(4), 759–780. doi: 10.2307/259353.Google Scholar
  97. Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194. doi: 10.1016/0165-4101(83)90011-3.CrossRefGoogle Scholar
  98. Wathne, K. H., & Heide, J. B. (2000). Opportunism in interfirm relationships: forms, outcomes, and solutions. Journal of Marketing, 64(4), 36–51. doi: 10.1509/jmkg.64.4.36.18070.CrossRefGoogle Scholar
  99. Williams, D. R., Duncan, W. J., & Ginter, P. M. (2010). Testing a model of signals in the IPO offer process. Small Business Economics, 34(4), 445–463. doi: 10.1007/s11187-008-9130-1.CrossRefGoogle Scholar
  100. Windsperger, J. (2001). The fee structure in franchising: a property rights view. Economics Letters, 73(2), 219–226. doi: 10.1016/S0165-1765(01)00491-8.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.DeGroote School of BusinessMcMaster UniversityHamiltonCanada

Personalised recommendations