Motivated by Bewley's Knightian view of innovative entrepreneurs, we explore the role that ambiguity, along with risk, may have to the capital structure explanation of the franchise decision. Ambiguity has a distinct behavior from risk, decreasing the value of the contingent claims that cautious external investors hold on firms' assets in place and growth options. Using a large panel of U.S. public innovative firms, we confirm that ambiguity helps to explain corporate leverage as conjectured by dynamic capital structure theory. Also, franchise firms' leverage responds more to ambiguity than the typical firm. Our results have important implications for the capital constraint hypothesis of the franchising literature. Ambiguity (unlike risk) can help explain lenders inertia and non-participation in businesses characterized by a highly dissagregated vertical network of (relatively small) local operations and economic value driven predominantly by growth options and intangible assets. Thus the incentive of some innovative entrepreneurs to franchise and bypass the binding capital constraint.