Entrepreneurial signaling to attract resources: the case of franchising

• Published in: Managerial and decision economics Vol. 30; no. 6; pp. 405 - 422
• Main Author: Michael, Steven C.
• Format: Journal Article
• Language: English
• Published: Chichester, UK John Wiley & Sons, Ltd 01-09-2009; John Wiley and Sons; Wiley Periodicals Inc
• Series: Managerial and Decision Economics
• Subjects: Competition; Cost of sales; Earnings; Economic competition; Economic concentration; Economic models; Economic resources; Empirical research; Entrepreneurs; Entrepreneurship; Franchise agreements; Franchising; Industrial market; Information; Investment; Profit forecasting; Resource management; Restaurant industry; Sales distribution; Sales reporting; Signalling; Studies
• ISSN: 0143-6570; 1099-1468
• DOI: 10.1002/mde.1460

Why firms and individuals reveal information is the subject of considerable theoretical research, but little empirical work has been possible due to a lack of suitable data. In this paper we examine why entrepreneurs selling business opportunities (franchisors) reveal information regarding potential profits (termed earnings claims). Empirical analysis shows that: first, contrary to theory, only a small percentage of franchisors claim; and, second, the franchisors that do claim have lower costs or are responding to competition. In particular, the prediction of theoretical models from economics that resource providers will not transact if information is not disclosed is not supported; resource providers can and do make significant investments even when entrepreneurs refuse to disclose information.