Effect of franchising on restaurant firms' risk evaluations in the bond market

Abstract

Given the volatility of the market and its susceptibility to economic shocks, restaurants consider risk-management to be a critical factor affecting their success and use franchising to mitigate risk by smoothing and augmenting cash inflows. Although the possible risk-reducing role of franchising has been addressed in prior research, it remains unclear whether franchising directly affects risk evaluations by stakeholders in the bond market. This study aims to uncover whether franchising enhances bond raters' perceptions of risk in the restaurant industry, and how firms' other strategic actions interact with franchising to affect their risk evaluations. Results generated from ordered logit regression and fixed effects OLS estimation suggest that the more involved in franchising a firm becomes, the higher bond ratings it can achieve. However, the positive influence of franchising on bond ratings is weakened by domestic geographic dispersion and internationalization. Theoretical contributions and practical implications are discussed.