Why do entrepreneurs use franchising as a financial tool?An agency explanation

Resum

When and why one type of entrepreneur (franchisor) attracts to its ventures another type of entrepreneur (franchisees) instead of passive investors is a central concern in entrepreneurship literature. Based on the informativeness principle of the principal-agent model, we claim that franchisees are not such an expensive financial capital source as has been argued in the literature because their compensation (return) is more efficiently designed: it directly depends on variables which are under franchisees� control. We therefore link agency and financial explanations for franchising. Our findings show that, once the agency argument is controlled for, the higher the cost of alternative funds for the franchisor, the more likely it is that franchisee capital will be used. We interpret this as a clue that franchising is also used as a financial capital source.