IDEAS home Printed from https://ideas.repec.org/a/spr/fininn/v2y2016i1d10.1186_s40854-016-0030-0.html
   My bibliography  Save this article

Franchise ownership redirection: real options perspective

Author

Listed:
  • Lukito Adi Nugroho

    (Meiji University)

Abstract

Background For over 40 years, the franchise ownership redirection hypothesis has attracted the attention of many scholars. This study, differing from previous ones, proposes an alternative approach for this hypothesis using a real options framework with the extension of agency theory. Method The real options model is built using the least square Monte Carlo method, where the franchisor’s decision to franchise is perceived as a deferred investment while maintaining the right of future acquisition. Result Tested using monte carlo simulation based hypothetical case, the model shows a different result from classical real options call model. This is mainly due to franchise contractual arrangement, where royalty fee lower the threshold of acquisition cost in converting the franchise outlet to company owned. Conclusion The aim of this study is to create an analytical framework that helps a franchisor decide whether or not toacquire and convert a franchise unit to a company-owned unit at a certain point in time, analyzing the choice as a deferment of investment. The franchisors that faces the opportunity to optimize profit by converting the franchise unit to a company-owned unit should acknowledge it as real options thus negotiate the terms with their franchisees.

Suggested Citation

  • Lukito Adi Nugroho, 2016. "Franchise ownership redirection: real options perspective," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-11, December.
    • Handle: RePEc:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0030-0
    DOI: 10.1186/s40854-016-0030-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1186/s40854-016-0030-0
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1186/s40854-016-0030-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, European Finance Association, vol. 8(1), pages 75-108.
    3. Catherine Casamatta, 2003. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," Journal of Finance, American Finance Association, vol. 58(5), pages 2059-2085, October.
    4. Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, vol. 18(2), pages 401-420, June.
    5. Norton, Seth W, 1988. "An Empirical Look at Franchising as an Organizational Form," The Journal of Business, University of Chicago Press, vol. 61(2), pages 197-218, April.
    6. Takeaki Kariya & Yasuyuki Kato & Tomonori Uchiyama & Takashi Suwabe, 2005. "Tenant Management and Lease Valuation for Retail Properties: A Real Options Approach," International Real Estate Review, Global Social Science Institute, vol. 8(1), pages 44-82.
    7. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    8. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
    9. Olav Sorenson & Jesper B. Sørensen, 2001. "Finding the right mix: franchising, organizational learning, and chain performance," Strategic Management Journal, Wiley Blackwell, vol. 22(6‐7), pages 713-724, June.
    10. Tailan Chi & Donald J McGuire, 1996. "Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(2), pages 285-307, June.
    11. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    12. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-968, December.
    13. repec:bla:jfinan:v:58:y:2003:i:5:p:2059-2086 is not listed on IDEAS
    14. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    15. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 223-233, April.
    16. Nina Gorovaia & Josef Windsperger, 2013. "Real Options, Intangible Resources and Performance of Franchise Networks," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(3-5), pages 183-194, April.
    17. Minkler, Alanson P., 1990. "An empirical analysis of a firm's decision to franchise," Economics Letters, Elsevier, vol. 34(1), pages 77-82, September.
    18. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sangkwon Kim & Jisang Lyu & Wonjin Lee & Eunchae Park & Hanbyeol Jang & Chaeyoung Lee & Junseok Kim, 2024. "A Practical Monte Carlo Method for Pricing Equity-Linked Securities with Time-Dependent Volatility and Interest Rate," Computational Economics, Springer;Society for Computational Economics, vol. 63(5), pages 2069-2086, May.
    2. Jenny Jing Wang & Jianfu Shen & Frederik Pretorius, 2023. "Valuing options to renew at future market value: the case of commercial property leases," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-35, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jell-Ojobor, Maria & Windsperger, Josef, 2014. "The Choice of Governance Modes of International Franchise Firms — Development of an Integrative Model," Journal of International Management, Elsevier, vol. 20(2), pages 153-187.
    2. Chabowski, Brian R. & Hult, G. Tomas M. & Mena, Jeannette A., 2011. "The Retailing Literature as a Basis for Franchising Research: Using Intellectual Structure to Advance Theory," Journal of Retailing, Elsevier, vol. 87(3), pages 269-284.
    3. Francine Lafontaine & Kathryn L. Shaw, 2005. "Targeting Managerial Control: Evidence from Franchising," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 131-150, Spring.
    4. Masayoshi Maruyama & Yu Yamashita, 2012. "Franchise Fees and Royalties: Theory and Empirical Results," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 167-189, May.
    5. Cliquet, Gérard & Pénard, Thierry, 2012. "Plural form franchise networks: A test of Bradach’s model," Journal of Retailing and Consumer Services, Elsevier, vol. 19(1), pages 159-167.
    6. Norton, Seth W., 1995. "Is franchising a capital structure issue?," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 75-101, October.
    7. Maruyama, Masayoshi & Yamashita, Yu, 2010. "The logic of franchise contracts: Empirical results of Japan," Japan and the World Economy, Elsevier, vol. 22(3), pages 183-192, August.
    8. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.
    9. Knott, Anne Marie & McKelvey, Bill, 1999. "Nirvana efficiency: a comparative test of residual claims and routines," Journal of Economic Behavior & Organization, Elsevier, vol. 38(4), pages 365-383, April.
    10. Tikoo, Surinder, 1996. "Assessing the franchise option," Business Horizons, Elsevier, vol. 39(3), pages 78-82.
    11. Canice Prendergast, 2000. "The Tenuous Tradeoff Between Risk and Incentives," NBER Working Papers 7815, National Bureau of Economic Research, Inc.
    12. Muriel Fadairo & Cyntia Lanchimba & Miguel Yangari, 2016. "Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Network. A Model of Incentives with Heterogeneous Agents," Working Papers 1602, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    13. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
    14. Gagné, Robert & Sigué, Simon Pierre & Zaccour, Georges, 1998. "Droit d’entrée et taux de redevance dans les franchises d’exploitation au Québec," L'Actualité Economique, Société Canadienne de Science Economique, vol. 74(4), pages 651-668, décembre.
    15. Kranz, Sebastian & Lewin-Solomons, Shira B., 2008. "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers 8/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    16. Combs, James G. & Ketchen, David Jr. & Hoover, Vera L., 2004. "A strategic groups approach to the franchising-performance relationship," Journal of Business Venturing, Elsevier, vol. 19(6), pages 877-897, November.
    17. Scott Shane & Maw-Der Foo, 1999. "New Firm Survival: Institutional Explanations for New Franchisor Mortality," Management Science, INFORMS, vol. 45(2), pages 142-159, February.
    18. Gonzalez-Diaz, Manuel & Solis-Rodriguez, Vanesa, 2012. "Why do entrepreneurs use franchising as a financial tool? An agency explanation," Journal of Business Venturing, Elsevier, vol. 27(3), pages 325-341.
    19. Chen, Jean Jinghan & Dimou, Irini, 2005. "Expansion strategy of international hotel firms," Journal of Business Research, Elsevier, vol. 58(12), pages 1730-1740, December.
    20. Muriel Fadairo & Cintya Lanchimba & Miguel Yangari, 2016. "Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Networks A Model of Incentives with Heterogeneous Agents," Working Papers halshs-01251344, HAL.

    More about this item

    Keywords

    Real options; Franchise; Agency theory; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0030-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.