The impact of pre-contract disclosure on M&A performance in franchising

Abstract

The franchise sector represents a unique opportunity to investigate pre-contract disclosure by target firms in mergers and acquisitions (M&As) due to the legal framework within which franchises operate. This study examines the role of Franchise Disclosure Documents (FDDs) as in-depth resources in cases in which franchise firms are M&A targets. Data were collected from 517 M&As in the US over a 20 year period (1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018) in the restaurant industry. The results show that franchise disclosures' effect on alleviating ex-ante information asymmetry is significant when a higher level of information asymmetry between the parties exists, i.e., when they are farther apart geographically, or if their initial business sector is different from that of the target firm. The study's implications regarding proprietary information disclosure for franchisors that may represent likely M&A targets are discussed.