Effect of franchising on the reliability of financial analysts’ earnings forecasts: Evidence from publicly traded US restaurant firms

Abstract

Unlike institutional investors, who have expertise in collecting and analyzing firm information to predict firms’ future performance, individual investors have a limited ability to conduct this task. Therefore, individual investors are known to commonly rely on financial analysts’ earnings forecasts, which are freely available to them. However, as demonstrated by numerous studies, financial analysts’ forecasts are not always accurate and free from bias. Drawing on screening theory and the innate financial and structural differences between highly franchised restaurants and their less franchised peers, the current study showed that analysts provide more accurate and less optimistically biased forecasts for the former than the latter. However, the positive impact of an additional number of analysts on the accuracy of forecasts was weaker for the former than the latter. The current study can help individual investors in the restaurant industry improve their understanding of financial analysts’ earnings forecasts and make better-informed investment decisions.