Unlocking Local Market Information Through Franchising

This paper examines the role of franchising in enabling firms to access valuable local market information. Using comprehensive data on U.S. franchised establishments, we show that franchisee-owned establishment openings robustly predict future local economic growth reflected by house price appreciation, whereas franchisor-owned outlets lack such predictive power. Franchisee investments are especially informative in markets with greater uncertainty and complexity and when facing higher investment hurdles. Franchisors appear sensitive to information frictions, avoiding direct investment in new markets that are geographically distant and lack direct flight connectivity. Our findings support the long-standing but untested assumption that franchisees possess superior private information.

This paper was accepted by Maria Guadalupe, business strategy.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05903.