Document Title

Who Reports Earnings When Reporting is Optional? The Market for New Franchises

Department/School

Accounting

Abstract

Most studies of voluntary disclosure examine the securities market, where voluntary disclosure is incremental to the requirements of highly developed reporting standards. In this paper, I examine the market for new franchises, where there is no requirement that potential franchise investors be given information relevant to earnings at the individual franchise level. The market for new franchises provides an opportunity to observe the outcome of managers' assessment of whether to disclose or withhold earnings information when that choice is not dominated by a disclosure requirement. I am able to observe firm and contract features associated with earnings disclosure in a present-day unregulated environment.

Approximately twenty-six percent of franchisors volunteer earnings-related information. I find that disclosing franchisors impose greater investment risk on new franchisees in the form of 1) higher contractual payments and 2) greater product demand uncertainty. Demand uncertainty is greater when franchisees are granted a territory--rather than a site, or when franchisors are expanding to foreign markets. I also observe that larger franchise systems, which collect data from more locations and therefore have more precise proprietary information, are less likely to disclose. This finding is notable in that it is contrary to what has been observed in the securities market, where large firms are associated with more volunary disclosure. The study suggests a possible role for initial disclosure regulation in that it may cause large firms to release proprietary information they would otherwise retain.

Document Type

Article

Publication Title

Journal of Accounting and Economics

Publication Date

3-2000

Volume

28

Issue

3

Pages

391-423

Digital Object Identifier (DOI)

10.2139/ssrn.224475

This document is currently not available here.

Share

COinS