Does franchising reduce geographically diversified restaurant firms' risk?

Purpose This study aims to examine how geographic diversification affects firms' risk by introducing the franchising strategy as a moderator. Design/methodology/approach The panel regression analysis was conducted with a sample of US restaurant firms. Specifically, a two-way random (or fixed) effects model clustered by firm was used to test hypotheses. Findings Findings show that geographic diversification does not significantly affect restaurant firms' risk. However, franchising aggravates the negative effect of geographic diversification on restaurant firms' risk, which contradicts the traditional theories of franchising. Research limitations/implications The results are expected to contribute to the diversification literature in the hospitality management by providing in-depth evidence for the effects of geographic diversification strategies on firms' risk. Specifically, the study provides relevant theories for explaining the effect of geographic diversification in the restaurant context by examining franchising, a prominent strategy in the restaurant industry. Practical implications The results encourage restaurant firms to improve their managerial capability to react to changes in a geographically wider scope of markets and develop franchising contracts specifically to prevent misbehavior and moral hazard on the part of franchisees. Originality/value Considering the lack of research on the effect of geographic diversification on restaurant firms' risk, this study examines not only the link between geographic diversification and firms' risk but also a contingent factor, franchising.