Revisiting the Rationality Assumption of Disclosure Laws: An Empirical Analysis

Abstract

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