GLOBAL BUSINESS & FINANCE REVIEW, Volume. 21 Issue. 1 (SPRING 2016), 13-23 pISSN 1088-6931 / eISSN 2384-1648∣Http://dx.doi.org/10.17549/gbfr.2016.21.1.13 ⓒ 2016 People and Global Business Association GLOBAL BUSINESS & FINANCE REVIEW www.gbfrjournal.org 2) Should Franchise Restaurant Companies Own So Much Real Estate? Abraham Park Graziadio School of Business and Management, Pepperdine University, Malibu, CA, USA A B S T R A C T This paper examines the performance effects of corporate real estate (CRE) ownership for franchise restaurant companies. Although several studies have investigated the performance effects of franchise firms (Leleux et al., 2003; Aliouche and Schlentrich, 2009; Hsu and Jang, 2009; Madanoglu et al., 2011; Aliouche, Kaen and Schlentrich, 2012), no previous study has focused on the performance effects of corporate real estate ownership on franchise restaurant companies. McDonald's was one of the earliest of companies that have extensively used CRE as a source of strategic advantage and as a way to reduce the agency costs associated with franchising. As retail companies seek to assemble valuable CRE portfolios that can generate sustainable competitive advantages, inferior or inefficient locations can significantly undermine their long-term financial performance. Furthermore, the existing franchise research has largely ignored the danger of over-exposure of real estate risk, as highlighted by the most recent global financial crisis. For these reasons and more, CRE ownership has the potential to significantly impact the performance of franchise restaurant companies and this paper seeks to fill this gap in franchise literature. By testing the effect of CRE ownership level on abnormal returns (Jensen’s alpha) and systematic risk (beta) of public franchise restaurant companies, we find that the CRE level has a significantly negative impact on the abnor- mal returns and significantly positive impact on the systematic risk of franchise restaurant firms, as well as restau- rants in general. Considering that non-franchise companies have higher average levels of CRE ownership, this study provides a partial explanation as to the outperformance of franchise restaurant companies compared to non-franchise restaurant companies. Keywords: Franchises; Franchise Performance; Corporate Real Estate Ⅰ. Introduction Ever since McDonalds began franchising in the 1950s, interest relating to franchising has grown enormously and gained popularity as a practical form of business. The advantage of the franchising format is that firms can combine the benefits of large-scale brand recognition, product uniformity and organizational design, along with † Abraham Park, PhD Graziadio School of Business and Management, Pepperdine University, Malibu, CA, USA E-mail: abraham.park@pepperdine.edu the retailing efforts and incentives of local owners (Klein, 1995). According to “Franchise Business Economic Outlook 2015,” an annual study conducted by the International Franchising Association, more than 781,000 franchised businesses generate a total economic output of more than $889 billion, or over 5 percent of the U.S. GDP. Combining both direct and indirect job activity, franchising generates one out of every seven jobs in the private sector, or nearly 14 percent of the nation’s private-sector employment. The exceptional growth of franchising businesses in recent decades has also drawn substantial research interest.