Start Date

8-1-2011 9:45 AM

End Date

8-1-2011 10:30 AM

Track

2. Track 2 - Poster Session

Subject Area

Finance and Economics

Faculty Member

Dr. Raymond S. Schmidgall schmidga@msu.edu Dr. Seung Hyun Kim kimseung@bus.msu.edu

Abstract

Franchising plays a significant role in the rapid growth of its retail sales. Franchising is a system in which the franchisor grants a license, trademark,and service mark, as well as advice, and assistance in organizing, merchandising, and managing the business as a long-term business relationship.This system is a major expansion strategy for the hotel industry because of its advantages. Actually, the annual retail sales of business-format franchising were about $246 billion in 1992 (Huber, 1993).In the lodging industry, franchising has contributed so significantly to the growth of major hotelchains since the 1960s that it has made lodging one of the ten most franchised industries in the United States Naturally, franchising systems have gained the interest of researchersand scholars thanks to this rapid growth speed and large scale business. Although there has been considerable interest in franchising, the present research considers whether this system is beneficial for the lodging industry in terms of profitability and intangible value. Based upon prior research, the resource scarcity theory is the most appropriate theory to explain the motivation of franchising companies. The resource scarcity theory suggests that the franchising system can grow more quickly because others' funds are used to finance the construction of the franchised units and other people manage those facilities. However, there is some debate as to whether franchising is more beneficial for the hospitality firms’ financial performance than owning in terms of business operation. Some research compares the financial performance of franchisedrestaurants with the financial performance of non-franchised restaurants. The results reveal that franchised restaurant performance is better. However, it is rare to find a study which compares the franchised lodging industry’s financial performance with that of non-franchised lodging firms. Therefore, the purpose of this research is to compare the financial performance of franchised-lodging industry firms with the financial performance of those which are non-franchised. Moreover, this study is conducted from the franchisors’ perspective. To identify whetherfranchising can influence lodging firms' financial performance, this study investigates the profitability and intangible values of both franchised and non-franchised restaurant firms. The collected data is the lodging companies’ annual reports from 2001 to 2009.The sample used in this study is composed of publicly held lodging firms. Financial data, which is derived from each company’s annual report, were collected from the National Association of Securities Dealers Automated Quotations (NASDAQ) website (http://www.nasdaq.com) and each lodging firm’s website. Some non-franchised lodging firms’ financial data were collected from Korean non-franchising lodging firms. The financial statement came from the Korean Financial Statement Publication Websites (http://dart.fss.or.kr). Since this study is conducted from the hotel franchisor’s perspective, hotel management companies and referral groups plus some companies which include a bigger proportion of casino and resorts than lodging are excluded. As a result, the number of hotel franchisors and non-franchisors is 16. The study period is 2001-2009. Even though the study period is 9 years, each company has a different policy and status to publicize their own financial information. Consequently, collected data are derived from a total number of 92 hotel firms which consist of 54 franchised firms and 38 non-franchised firms. The variables include ROA (Return on Assets), ROE (Return on Equity), intangible value, firm size, leverage, and franchising dummy. The results of the hierarchical regression model, independent t-test, and descriptive statistics support the positive association between ROA, intangible value and franchising. The results of this study show that franchised lodging firms have higher profitability and intangible value than non-franchised firms, and indiscriminate expansion and low financial leverage can lead to poor financial performance. The literature review of this study mentioned that franchisors adopt the franchising system for rapid expansion. Since the franchisee’s funds are available under this system, franchisors can overcome the resource constraint. Also, the economies of scale theory support the efficiency of the franchising system’s resource distribution. Unfortunately, even though there are multiple advantages in a franchising system, the research which treats the relationship between a franchising firm and the firm’s performance is rare. Therefore, this study examines the influence of franchising in lodging firms’ profitability and intangible value. Generally, the results of this study reveal that lodging firms adopting franchise system showed a higher profitability and intangible value than non-franchised lodging firms. Specifically, this study proves that franchised lodging firms record a higher profitability and intangible value, while controlling other variables, including firm size and financial leverage. In addition, this study indicates that a bigger firm size negatively influences in the financial performance of lodging firms. This means that indiscriminate expansion of franchising systems contains the possibility of poor performance in terms of profitability and intangible value. Moreover, this study shows the positive relationship between ROE and debt to owner’s equity ratio. This is the evidence that the lower owner’s equity proportion or the higher liabilities’ proportion can lead to better financial performance of the lodging firms. Finally, this study has some limitations. First, the hotel industry’s profitability can be influenced by economic circumstances. Since each company’s financial data have different periods, this study did not faithfully cover the economic situation. Secondly, the model that is used in this study can be applied only to lodging firms. Other industries may have different models because other industries have different competitive environment and business conditions that affect the financial performance. Thirdly, the size of the sample is not big because lodging firms’ franchisors are rare. This fact led to the restriction of available financial data. Lastly, since this study’s financial data were collected from a global franchisor’s financial data, different currency rates and accounting standards, such as GAAP and IFRS can be a restriction to the analysis financial data. If there is a future study which is related with this concept, the future study can consider these factors in models to further examine the lodging industry's financial performance and intangible value.

Keywords

Franchising, Lodging industry, Profitability, Intangible Value

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Jan 8th, 9:45 AM Jan 8th, 10:30 AM

Are Franchising Systems Beneficial for Lodging Industry in terms of Profitability and Intangible Value?

Franchising plays a significant role in the rapid growth of its retail sales. Franchising is a system in which the franchisor grants a license, trademark,and service mark, as well as advice, and assistance in organizing, merchandising, and managing the business as a long-term business relationship.This system is a major expansion strategy for the hotel industry because of its advantages. Actually, the annual retail sales of business-format franchising were about $246 billion in 1992 (Huber, 1993).In the lodging industry, franchising has contributed so significantly to the growth of major hotelchains since the 1960s that it has made lodging one of the ten most franchised industries in the United States Naturally, franchising systems have gained the interest of researchersand scholars thanks to this rapid growth speed and large scale business. Although there has been considerable interest in franchising, the present research considers whether this system is beneficial for the lodging industry in terms of profitability and intangible value. Based upon prior research, the resource scarcity theory is the most appropriate theory to explain the motivation of franchising companies. The resource scarcity theory suggests that the franchising system can grow more quickly because others' funds are used to finance the construction of the franchised units and other people manage those facilities. However, there is some debate as to whether franchising is more beneficial for the hospitality firms’ financial performance than owning in terms of business operation. Some research compares the financial performance of franchisedrestaurants with the financial performance of non-franchised restaurants. The results reveal that franchised restaurant performance is better. However, it is rare to find a study which compares the franchised lodging industry’s financial performance with that of non-franchised lodging firms. Therefore, the purpose of this research is to compare the financial performance of franchised-lodging industry firms with the financial performance of those which are non-franchised. Moreover, this study is conducted from the franchisors’ perspective. To identify whetherfranchising can influence lodging firms' financial performance, this study investigates the profitability and intangible values of both franchised and non-franchised restaurant firms. The collected data is the lodging companies’ annual reports from 2001 to 2009.The sample used in this study is composed of publicly held lodging firms. Financial data, which is derived from each company’s annual report, were collected from the National Association of Securities Dealers Automated Quotations (NASDAQ) website (http://www.nasdaq.com) and each lodging firm’s website. Some non-franchised lodging firms’ financial data were collected from Korean non-franchising lodging firms. The financial statement came from the Korean Financial Statement Publication Websites (http://dart.fss.or.kr). Since this study is conducted from the hotel franchisor’s perspective, hotel management companies and referral groups plus some companies which include a bigger proportion of casino and resorts than lodging are excluded. As a result, the number of hotel franchisors and non-franchisors is 16. The study period is 2001-2009. Even though the study period is 9 years, each company has a different policy and status to publicize their own financial information. Consequently, collected data are derived from a total number of 92 hotel firms which consist of 54 franchised firms and 38 non-franchised firms. The variables include ROA (Return on Assets), ROE (Return on Equity), intangible value, firm size, leverage, and franchising dummy. The results of the hierarchical regression model, independent t-test, and descriptive statistics support the positive association between ROA, intangible value and franchising. The results of this study show that franchised lodging firms have higher profitability and intangible value than non-franchised firms, and indiscriminate expansion and low financial leverage can lead to poor financial performance. The literature review of this study mentioned that franchisors adopt the franchising system for rapid expansion. Since the franchisee’s funds are available under this system, franchisors can overcome the resource constraint. Also, the economies of scale theory support the efficiency of the franchising system’s resource distribution. Unfortunately, even though there are multiple advantages in a franchising system, the research which treats the relationship between a franchising firm and the firm’s performance is rare. Therefore, this study examines the influence of franchising in lodging firms’ profitability and intangible value. Generally, the results of this study reveal that lodging firms adopting franchise system showed a higher profitability and intangible value than non-franchised lodging firms. Specifically, this study proves that franchised lodging firms record a higher profitability and intangible value, while controlling other variables, including firm size and financial leverage. In addition, this study indicates that a bigger firm size negatively influences in the financial performance of lodging firms. This means that indiscriminate expansion of franchising systems contains the possibility of poor performance in terms of profitability and intangible value. Moreover, this study shows the positive relationship between ROE and debt to owner’s equity ratio. This is the evidence that the lower owner’s equity proportion or the higher liabilities’ proportion can lead to better financial performance of the lodging firms. Finally, this study has some limitations. First, the hotel industry’s profitability can be influenced by economic circumstances. Since each company’s financial data have different periods, this study did not faithfully cover the economic situation. Secondly, the model that is used in this study can be applied only to lodging firms. Other industries may have different models because other industries have different competitive environment and business conditions that affect the financial performance. Thirdly, the size of the sample is not big because lodging firms’ franchisors are rare. This fact led to the restriction of available financial data. Lastly, since this study’s financial data were collected from a global franchisor’s financial data, different currency rates and accounting standards, such as GAAP and IFRS can be a restriction to the analysis financial data. If there is a future study which is related with this concept, the future study can consider these factors in models to further examine the lodging industry's financial performance and intangible value.