Revisiting the Rationality Assumption of Disclosure Laws: An Empirical Analysis

Abstract

Disclosure laws are based on one central assumption: that disclosees are, by their very nature, rational actors. This article questions the validity of this theoretical assumption. The article empirically shows that franchisees, who are considered sophisticated disclosees, are unrealistically optimistic about disclosed risks. In this empirical study, franchisees (N = 205) completed an online research questionnaire, in which they compared their own chances of experiencing disclosed risks with the chances of their colleagues. It was found that franchisees were optimistically biased. Franchisees believed that the chances that their franchisor might opportunistically terminate their franchise are significantly lower than that of an average franchisee in their chain and state. The theoretical and practical implications of overconfidence in the franchise business are discussed.