Targeting Managerial Control: Evidence from Franchising

Franchisors simultaneously operate outlets under two distinct incentive schemes: franchising and company ownership. Using an extensive panel dataset, we show that experienced franchisors maintain a stable level of corporate ownership over time. However, the targeted rate of company ownership varies considerably across firms. We show that franchisors with high brand name value, measured by major media expenditures and other proxies, have high rates of company ownership. We argue that franchisors with valuable brands have high rates of company ownership so they have incentives to exert more control and they can better protect their brands from franchisee free-riding.