Strategic Debt in Vertical Relations: Evidence from Franchising

Abe de Jong, Tao Jiang and Patrick Verwijmeren

Journal of Retailing, 2011, vol. 87, issue 3, 381-392

Abstract: In this paper, we examine the strategic use of debt in franchise organizations. We focus on both the franchisee's and the franchisor's capital structures. The primary goal of this study is to examine whether franchisors impose limits on franchisees’ debt levels to be able to increase their own leverage. We find that the franchisor's leverage is significantly related to the maximum leverage allowed for the franchisee. As the franchisor sets an upper limit on the franchisee's debt ratio, the franchisor can raise more debt and therefore seizes tax benefits, since interest payments are tax deductible. We find that this effect is stronger in chains with larger fractions of franchised outlets.

Keywords: Franchising; Capital structure; Strategic debt (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jouret:v:87:y:2011:i:3:p:381-392

DOI: 10.1016/j.jretai.2010.12.002

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