Essays on Business Economics

Title of Document: ESSAYS ON BUSINESS ECONOMICS Giorgo Sertsios, Doctor of Philosophy, 2011 Directed By: Professor Roger R. Betancourt Department of Economics Professor Gordon M. Phillips Department of Finance This dissertation consists of three essays, of which two are related. In the …rst essay I model the interaction between a franchisor and its franchisees. I examine how a franchisor uses the investment requirements she asks franchisees as a tool to reduce franchisees’ underprovision of sales e¤ort. Theoretically, I show that if the franchisor’s reputation is highly important the franchisor asks for higher investment requirements when penalizing a misbehaving franchise is more di¢ cult (weaker law enforcement) and when directly monitoring franchisees is more costly. In the second essay, I empirically test the theoretical predictions of the …rst essay using two datasets at the franchisor level. I measure weak law enforcement using the passing of state level good-cause termination/nonrenewal laws for franchise contracts and I measure monitoring costs using the number of states in which a franchisor operates. Using a database that contains information for 278 franchisors, before and after the laws were passed in some states, I …nd that the passing of the laws implied an incremental 4.7% increase in investment requirements for franchisors located in states where the laws were passed. Using a large database (10,047 franchisor-year observations), posterior to the passing of the laws, I …nd that franchisors located in states where good-cause termination/nonrenewal laws were passed ask for investment requirements 4.5% higher than franchisors located in states without such laws. Using both datasets I …nd evidence that franchisors that expand their operations to an additional state increase the average investment requirements they ask a prospective franchisee between 0.6-1%. The third essay, which is in conjunction with Gordon Phillips, empirically studies how …nancial distress and bankruptcy a¤ects …rms’ choices of product quality and prices using data from the airline industry. We …nd that an airline’s quality and pricing decisions are di¤erentially a¤ected by …nancial distress and bankruptcy. Product quality decreases when airlines are in …nancial distress, consistent with …nancial distress reducing a …rm’s incentive to invest in quality. In addition, …rms price more aggressively when in …nancial distress consistent with them trying to increase short-term market share and revenues. In contrast, in bankruptcy product quality increases relative to …nancial distress periods. ESSAYS ON BUSINESS ECONOMICS