Tech Stock Valuation

FRANCHISE AGREEMENTS 235

III. FRANCHISE AGREEMENTS

A wide variety of monitoring mechanisms outside the firm work together with

mechanisms inside the firm to establish an optimal set of restrictions on firm

activity. Interestingly, firms themselves often suggest such restrictions.

Commercial bank loan covenants, financial audits by independent auditors, and

performance scrutiny by independent security analysts are all common examples

of outside monitoring mechanisms agreed to by firms.

Franchise agreements are a prime example of voluntary contractual arrange-

ments outside the firm that can be viewed as corporate governance mechanisms.

Franchise agreements giv ...