Franchising's impact on overinvestment behavior and post-overinvestment performance: A study of American restaurant companies

Jiandong Zhao, Purdue University

Abstract

Overinvestment is one common abnormal investment behavior in corporate management that causes waste of free cash flow and reduces productivity and efficiency of opportunity utilization. Despite the importance of overinvestment issue, limited attention has been paid to understand it in the restaurant industry, one of the major industries world-wide. The current restaurant industry is shaped by significant structural changes in the past decades. Franchising, a commonly used development strategy, has contributed significantly to this change. Since franchising has been regarded as a strategy that influences on the business model and management decision making, it is worthy to investigate the overinvestment issue while taking franchising into account. Thus, the current study is initiated to link franchising and overinvestment and to investigate how the franchising could influence overinvestment behavior and post-overinvestment performance in restaurant industry based on agency theory. The regression model based on literature in economics and finance and the T-test are utilized to identify and categorize overinvestment behavior. The logistic regression model and ANOVA multiple comparison are applied to investigate the hypotheses developed from the extant literature. Findings in the present study provide not only academic contributions but also results of practical application. First, the study contributes academically by applying a new overinvestment categorization method. Second, according to the results, franchising companies that have less financial constraints and lower pressure of capital expenditure are more likely to overinvest. The results from performance comparisons with different performance indicators suggest two findings. Overinvestment has negative impact on franchising restaurant companies but brings positive impact to non-franchising ones. Also, contrary to common belief franchising strategy does not necessarily bring better operating performance if overinvestment has become an issue. Detailed findings and implications are presented in the result and conclusion sections.

Degree

M.S.

Advisors

Jang, Purdue University.

Subject Area

Home economics|Commerce-Business

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