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Evidence of franchising on outperformance in the restaurant industry: A long term analysis and perspective

Nan Hua (Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston, Houston, Texas, USA)
Michael C. Dalbor (William F. Harrah College of Hotel Administration, University of Nevada Las Vegas, Las Vegas, Nevada, USA)

International Journal of Contemporary Hospitality Management

ISSN: 0959-6119

Article publication date: 8 July 2013

2917

Abstract

Purpose

The existing research finds a positive financial impact of franchising for relatively short time windows, usually less than ten years. As a result, these studies leave one critical research question unanswered: does franchising influence restaurant firms' financial performance consistently in the long term? The purpose of this paper is to address the research question and offer relevant managerial implications.

Design/methodology/approach

This study uses and expands the models derived from Ohlson, from Amir and Lev and from Lev and Zarowin to address the financial impacts of franchise in the restaurant industry from a long-term and consistent perspective.

Findings

Carrying out empirical tests over all ten-year testing windows that span 1980-2010 with quarterly data, this study finds that franchising is an effective mechanism to systematically and consistently outperform non-franchise firms in the long term and provides compelling empirical evidence to answer the research question. Further, limited-service restaurants also exhibit consistent and positive impacts on firm financial performance in the long term, suggesting limited-service operations are also effective to enhance firm value and outperform competitors.

Originality/value

First, this study expands the set of variables employed by many financial researchers to explain stock price in the restaurant industry. Second, this study tests and shows that franchising systematically leads to financial outperformance over the long term. Third, this study tests and shows that limited service restaurants consistently and systematically outperform their peers in the long run. Finally, the results of this study can be used to help investors and fund managers select restaurant company stocks and offer compelling evidence in support of franchising and limited service operations.

Keywords

Acknowledgements

This research was supported by the Caesars Foundation.

Citation

Hua, N. and C. Dalbor, M. (2013), "Evidence of franchising on outperformance in the restaurant industry: A long term analysis and perspective", International Journal of Contemporary Hospitality Management, Vol. 25 No. 5, pp. 723-739. https://doi.org/10.1108/IJCHM-Aug-2012-0138

Publisher

:

Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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