Franchising – making optimal financial choices


On February 20, Tao Jiang has defended his PhD thesis entitled “<link erim events _blank>Capital Structure Determinants and Governance Structure Variety in Franchising” at the Rotterdam School of Management, Erasmus University. Tao Jiang’s dissertation deals with two main topics in franchising. First, his thesis investigates the determinants of capital structures in franchising firms and their subsequent impact on the franchise financing decisions. Secondly, the thesis studies the efficient governance structure choice in franchising firms.

In his research, Jiang concludes that firms franchise to benefit from the reduced franchisees’ operational risks by limiting the debt level, such that the franchisor can bear more debt and gain tax-deduction benefits. This finding can help franchise managers to maximize firm value when making financing decisions.

Next, he also finds that a positive systemic effect, instead of the brand name value or location (or other) differences between outlets, is the necessary condition for a dual distribution governance structure to be efficient. This finding offers franchise managers a better understanding why dual-distribution franchising is a popular form, which can help them make better decisions when choosing between company ownership and franchising.

Jiang’s promoters are Prof.dr. George Hendrikse, Professor of Economics of Organisation, and Prof.dr. Abe de Jong, Professor of Corporate Finance, Rotterdam School of Management, Erasmus University Rotterdam. Other members of the Doctoral Committee are Prof.dr. Barbara Krug, Prof.dr. Peter Roosenboom and Dr. Josef Windsperger.

About Tao Jiang
Tao Jiang was born in Tianjin, China on March 13th, 1978. He studied foreign trade in Tianjin University of Finance and Economics from 1997 to 2001 and received his Bachelor’s degree in Economics. He then worked for the Netherlands Business Support Office (NBSO) for one year in Tianjin. Since 2002, he joined in the research Master’s programme, majoring in organisation, at Tilburg University in the Netherlands and received his MSc in 2003.

In 2004, he joined the PhD programme at the Department of Organisation and Personnel Management of the Rotterdam School of Management, Erasmus University. His main research interests focus on governance structure choice and corporate finance, specifically in franchising field. He presented his papers in international conferences, like International Conferences on Economics and Management of Networks and International Council for Small Business (ICSB) World Conference.

Currently, Jiang holds a position at the Customer and Market Intelligence Department of TNT Express.

Thesis Abstract:
This thesis investigates two questions: the determinants of capital structure in franchising and its subsequent impact on the franchise financing decisions; and the efficient governance structure choice in franchising. Jiang posits that firms franchise in order to benefit from the reduced franchisees’ operational risks by limiting the debt level, such that the franchisor can bear more debt and gain tax-deduction benefits. Specific hypotheses are based on various theories like resource-based view, agency theory, signalling theory and classical capital structure theories. Jiang empirically finds that as the franchisor requires franchisees to put more equity in the initial investment, the franchisor does bear a higher debt level and gains from tax deductibility of interest expenses. This effect is stronger when more units are franchised. Moreover, he also finds evidence supporting his prediction that the franchisee’s leverage is positively linked with franchisor’s maturity. This suggests that as the franchisor imposes a higher level of franchisee’s leverage in order to screen capable franchisees, the franchisor also increases their maturity to reduce bankruptcy risks.

This thesis also explores the impact of governance structure on the incentives to invest in specific assets for the franchisor as well as the distributors. Wholly-owned, wholly-franchised, and mixed franchise systems are considered. Circumstances are identified when a dual distribution governance structure uniquely allocates efficient ownership over assets. A necessary condition for the efficiency of a dual distribution governance structure is a positive systemic effect, not the value of the brand name or location (or other) differences between outlets. Jiang finds that whether dual distribution benefits are realised in a franchise or a cooperative franchise depends on whether most value is added upstream or downstream.

More Information
Pictures of the Defense
Full text of the Dissertation