Franchising structure changes and shareholder value: evidence from store buybacks and refranchising

Abstract

Drawing on agency theory and transaction cost analysis, this study investigates the impact of refranchising and buybacks of downstream retail units by franchising firms on shareholder value (i.e., stock returns). It further evaluates the contingency role of firm and industry factors in shaping this impact. An event study analysis over the years 2001-2020 confirms that both refranchising and buybacks positively affect stock returns. However, notable impact differences emerge between the two types of strategic decisions. For refranchising, firms with lower royalty rates, smaller returns-on-assets (ROA), and higher trade credit provided generate higher stock returns. Whereas, for buybacks, firms with higher royalty rates derive more value in stock markets. Analysis further shows that investors judge refranchising (buybacks) less (more) favorably in munificent industries, but industry dynamism has no effect on the stock returns generated from these moves. Together, the study offers important implications for franchising theory and retail practice in marketing. Valuation Insight: Changing the fraction of product sales handled by franchisees may affect the value of a franchising firm. This paper shows that, keeping total sales constant, both an active increase (refranchising) and decrease (buybacks) in franchisee contribution initiated by the franchising firm raise the firm’s market value. The explanation lies in efficient contracting theory which suggests that the market rewards firms willing to make efficiency-driven adjustments to their distribution structures, irrespective of direction.