Does managerial ownership influence franchising in restaurant companies?

Although the link between managerial ownership and firm performance is often explained in relation to a firm's risk-taking behavior, little is known about how managerial ownership affects corporate risk-taking in industries characterized by high financial and operational risks, like the restaurant industry. To understand this important and understudied link, our study draws upon agency theory to examine the relationship between managerial ownership and franchising, typically a risk-reduction strategy of restaurant firms. Our results from panel data analyses using a sample of 962 firm-year observations show that managerial ownership is negatively associated with degree of franchising. Further, we find that after considering the scope of managerial discretion, there is a U-shaped relationship between managerial ownership and degree of franchising such that the degree of franchising decreases as managerial ownership increases up to a certain level, but then increases in tandem as managerial ownership increases to higher levels. Our results indicate that there is an optimal level of franchising associated with managerial ownership, implying that owners can influence their firms' risk-taking behavior by setting target managerial ownership goals and designing effective incentive contracts.