Franchise ownership redirection: real options perspective

Lukito Adi Nugroho ()
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Lukito Adi Nugroho: Meiji University

Financial Innovation, 2016, vol. 2, issue 1, 1-11

Abstract: Abstract Background For over 40 years, the franchise ownership redirection hypothesis has attracted the attention of many scholars. This study, differing from previous ones, proposes an alternative approach for this hypothesis using a real options framework with the extension of agency theory. Method The real options model is built using the least square Monte Carlo method, where the franchisor’s decision to franchise is perceived as a deferred investment while maintaining the right of future acquisition. Result Tested using monte carlo simulation based hypothetical case, the model shows a different result from classical real options call model. This is mainly due to franchise contractual arrangement, where royalty fee lower the threshold of acquisition cost in converting the franchise outlet to company owned. Conclusion The aim of this study is to create an analytical framework that helps a franchisor decide whether or not toacquire and convert a franchise unit to a company-owned unit at a certain point in time, analyzing the choice as a deferment of investment. The franchisors that faces the opportunity to optimize profit by converting the franchise unit to a company-owned unit should acknowledge it as real options thus negotiate the terms with their franchisees.

Keywords: Real options; Franchise; Agency theory; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1186/s40854-016-0030-0

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