The franchise business model is distinct in the way it seeks to lower agency costs when compared to a ‘traditional’ corporation. This study seeks to ascertain whether the potential benefits of reduced agency costs can be captured in the returns of a portfolio of franchisor stocks. Using a purpose-built portfolio of companies employing ‘business format franchising’ as their core strategy over the past two decades, we find that the sources of systematic risk for our portfolio of franchisor stocks include market beta, size and the value premia. We find historical evidence that franchisor stocks have significantly outperformed the market in the past, however, these excess returns seem to be slowly declining in recent times. We show that franchisor stocks outperform the broader market in both expansionary and contractionary phases of the U.S. business cycle and they are more sensitive to changes in monetary conditions than the wider market, reflecting their size and value characteristics.
