How do firms' partnering strategies impact the size of their partner-based retail networks? We draw on agency theory to address this question in the context of franchising. Our econometric analyses (based on nine years of longitudinal balanced panel data) include assessment of data nonstationarity and estimation of a dynamic panel data model that accounts for unobserved heterogeneity and endogeneity. Our findings indicate that franchisee network size is driven more by franchisor strategies that

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... mitigate agency costs than by strategies that simply lower entry and ongoing costs and barriers for franchisees. terms of the number of retail outlets in the franchise system. This approach recognizes the strong positive relationship between network size and system sales and between system sales and firm value (Kling et al 2009), includes both privately and publicly held franchisors, uses archival data, can be obtained for franchisors across various industries and emulates the dominant tradition for measuring performance in the franchising literature. Dant et al (1996) report that a majority of studies of performance in franchise systems use measures based on the number of outlets in the system. However, many of these studies (for example, Castrogiovanni and Justis focus on the overall system (including franchisor-owned outlets). This approach is appropriate when the goal is to evaluate overall franchisor performance. However, many franchisor strategies are designed to specifically impact franchisees and drive the size of the franchisee network rather than the total network. Hence, it is more appropriate to consider franchisee network size than total network size when assessing performance implications of these franchisor strategies. Overall system size is more likely to be affected by factors other than a franchisor's franchisee-focused strategies. Therefore, given our substantive aims, we chose to focus on the number of franchised outlets in a franchise system as our measure of franchisor performance. The importance of understanding how strategic decisions made by a franchisor influence the size of its franchisee network is reinforced by divergent perspectives on drivers of network size. Conventional wisdom among practitioners has often emphasized financial cost-based ideas 4 Kosová and Lafontaine (2010) also measure performance of just the franchised component of franchised systems. However, they measure this performance in terms of exit from franchising and the growth rate of the franchisee network rather than franchisee network size. Instead, they use network size as an explanatory variable. Note that extant research (for example, Dant et al 2007; Shane et al 2006) has shown that other explanatory variables used by Kosová and Lafontaine (2010) are also predictors of network size.