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Recent research in hospitality financial management
Henry Tsai, Steve Pan and Jinsoo Lee
School of Hotel & Tourism Management, The Hong Kong Polytechnic University, Kowloon, Hong Kong SAR
Abstract
Purpose – The purpose of this paper is to review and synthesize published contemporary hospitality financial management research from 1998 through 2009 and provide future research directions. Design/methodology/approach – The authors began their initial literature search by entering into the ABI/INFORM database via ProQuest 19 pre-identified keywords (i.e. debt, financing, ownership) related to the major functions of financial management, namely investing, financing, and dividend decisions, as well as commonly indexed keywords in hospitality finance research. The paper then expanded the authors’ literature list through the reference lists of the studies that they initially identified. The authors limited their search to published studies between 1998 and 2009 and within hospitality journals written in English. Findings – The paper identifies 98 published papers that represented the major work and efforts in expanding the body of knowledge in both the theoretical and practical perspectives of hospitality financial management. The major categories of papers include hospitality financing, investing, dividend policy, financial condition, and performance. Areas that warrant further investigation are noted throughout the paper. Research limitations/implications – The papers review provides academics and practitioners an overview of the updated body of knowledge in the field and suggests the need for further in-depth research to extend the literature and prompt better financial decision making for practitioners. Originality/value – Since Harris and Brown’s and Atkinson and Jones’s reviews of past hospitality accounting and finance studies which mostly focused on the former, hospitality financial management research alone has grown noticeably in terms of diverse topics and sophistication of methodologies. To the authors’ knowledge, no updated reviews that focus solely on hospitality finance research have been published in the last 12 years, and the need for such a task motivated them to conduct a review of recent research on this topic. Keywords Dividends, Financing, Firm performance, Hospitality financial management, Investing Paper type Literature review

Hospitality financial management 941
Received 22 August 2010 Revised 10 January 2011 7 March 2011 Accepted 9 March 2011

1. Introduction Financial management is the backbone of any business, including firms involved in hospitality (including but not limited to hotels, restaurants, and casinos). In the hospitality industry, managers at the property level are charged with using owners’ invested assets to enhance revenues and reduce expenses to achieve desired net profits. However, managers at the corporate level are more involved in issues related to investing excess cash and raising debt and equity capital. Dividend policy and decisions, which to some extent signal board-level views on the firm’s future development opportunities, also play a significant role in hospitality finance. The hospitality industry is fairly capital-intensive (Karadeniz et al., 2009; Lee, 2007), requiring managers at all levels to have adequate financial management skills and access to strategies for achieving the goal of financial management, namely value enhancement or creation for owners

International Journal of Contemporary Hospitality Management Vol. 23 No. 7, 2011 pp. 941-971 q Emerald Group Publishing Limited 0959-6119 DOI 10.1108/09596111111167542

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(Andrew et al., 2007). Nevertheless, given increasingly complicated operating environments and more sophisticated and educated customers and stakeholders, good financial management has become even more critical in coping with ever-changing operating parameters. It is critical that practitioners as well as academics understand the recent research on financial decisions and phenomena. Research in hospitality financial management has noticeably emerged since the late 1980s and early 1990s. Many papers have been published to disseminate new knowledge or unveil existing phenomena in the field, and to explain the managerial implications of financial management issues and problems to industry stakeholders. However, as Harris and Brown (1998) point out in their review of research and development in hospitality accounting and financial management (with more focus on accounting than finance), some of this work has tended to be inward-looking, with inadequate methodologies and superficial results. Atkinson and Jones (2006) also noted in their review (with more focus on management accounting than finance) that not much progress has been observed in areas highlighted as “innovative” in 1998, and little evidence exists of the development of new theories. Another critique is that studies have tended to replicate mainstream financial research, with the only major difference being the use of a hospitality sample. This contributes minimally, if at all, to our knowledge. While the hospitality industry does share some commonalities with other service industries, some unique operating characteristics necessitate separate examination of particular topics. Since Harris and Brown’s (1998) and Atkinson and Jones’s (2006) works, hospitality financial management research alone has grown noticeably in terms of diverse topics and sophistication of methodologies. The need for an update motivated us to conduct a review of recent research. The goal of this paper is to present the status of contemporary hospitality financial management research from 1998 through 2009 and to suggest future research opportunities. We began our initial literature search by entering into the ABI/INFORM database via ProQuest 19 pre-identified keywords related to the major functions of financial management, namely investing, financing, and dividend decisions (Chatfield and Dalbor, 2005), as well as commonly indexed keywords in hospitality finance research. The 19 keywords included risk, return, firm performance, stock, bond, weighted average cost of capital (WACC), capital structure, bankruptcy, financial, ownership, dividend, debt, financing, equity, asset, growth, financial management, shareholder, and corporate governance. We then expanded our literature list through the reference lists of the studies we identified. We have not included every possible piece of research in this paper due to constraints regarding the availability of journals, language issues, and relevance, among other issues, but limited ourselves to papers published in hospitality journals between 1998 and 2009 and written in English. The list of journals which appeared during our search is presented in Table I. This review is sequenced around the major functions of hospitality financial management, namely hospitality financing, hospitality investing, and dividend policy studies. Studies relevant to financial conditions and performances are also reviewed and discussed. The literature included in this paper is summarized in Table II. 2. Hospitality financing Hospitality firms are heavy users of long-term debt to support their asset investment (Singh and Upneja, 2008) and growth opportunities, and the debt structure is comprised

Journal title International Journal of Hospitality Management Journal of Hospitality & Tourism Research Journal of Hospitality Financial Management Cornell Hospitality Quarterly (formerly known as Cornell Hotel & Restaurant Administration Quarterly) Journal of Foodservice Business Research International Journal of Contemporary Hospitality Management International Journal of Hospitality & Tourism Administration FIU Hospitality Review Hospitality Review Tourism & Hospitality Management Tourism & Hospitality Research Tourism Management UNLV Journal of Hospitality, Tourism and Leisure Science

Number of papers 36 21 12 8 6 6 3 1 1 1 1 1 1

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Table I. Journal titles included in the current study (1998-2009)

largely of fixed-rate debt (Singh, 2009a). For example, the mean debt ratio of casinos and hotels in the USA during 1999-2003 was 52.6 percent (Tsai and Gu, 2007b) and 41.9 percent, respectively (Tsai, 2005), and for restaurants was 26.6 percent (Tsai and Gu, 2007a). Since the contemporary business world is constantly changing in response to the competitive and regulatory environment, which in turn is also reshaping the financial service industry, a central issue for hospitality operators and investors is the uncertainty associated with the role of financial institutions as suppliers of capital (Singh and Kwansa, 1999). Capital supply and demand has become a key research theme. 2.1 Debt financing Elgonemy (2002) suggests considering four factors before seeking debt financing: business risk, the need for flexibility, owners’ risk aversion, and tax. First, the hotel business is highly influenced by seasonality, economy, and management capability, among other factors, and the operating results of hotels can therefore fluctuate considerably. One way to compensate for a higher level of business risk is to employ a relatively conservative capital structure (i.e. high equity vs low debt). Second, solvency ratios, representing the degree of debt use and the ability to meet long-term debt obligations (Schmidgall, 2006) indicate not only the level and possibility of financial distress but also the firm’s flexibility in raising additional debt. Firms with low debt and high equity can increase their gearing level by issuing more debt for future growth (Madan, 2007). Third, owners who are more risk averse have a conservative debt strategy, while aggressive owners may be willing to take the greater risk inherent in using more debt because of the resulting leverage. Fourth, a higher marginal tax rate often encourages the use of debt, but only to a certain level before costly financial distress emerges. Normally, it is cheaper to acquire debt financing than equity capital. However, if the cost of debt becomes too high, or debt capital becomes more difficult to find (as was the case during the global financial crisis of late 2008 and early 2009), firms may resort to selling common stocks or even lodging assets in raising funds. A good example was Las Vegas Sands’ offering of US$525 million worth of common stocks, preferred shares and warrants to avoid defaulting on its loans in late 2008 (New York Times, 2008).

Upneja and Dalbor (1999). Kim and Gu (2004). Kim and acquisition Arbel (1998). Jang and Kim (2009). Singh and Upneja (2007). Chen et al. Singh and Upneja (2007). Madanoglu. Erdem and Gursoy (2008) Gu and Kim (2001). Lee and Kwansa (2008). Skalpe (2003). Damitio and Schmidgall budgeting (2002). Madanoglu. Tsai and Gu (2007a). Skalpe (2003) Systematic risk Barber et al. Singh (2009b) Koh and Jang (2009). Oak and Dalbor (2008a). Kim et al. Lee (2008a). Sharma (2007). Upneja et al. Madan (2007). Chathoth and Olsen (2007b). (2009) Stock investment Chen (2007). (2002a). risk exposure Singh and Upneja (2008) Interest rate risk Singh (2009a). Tang and Jang (2007) 944 Short-term debt Interest rate Leasing behavior Equity Cost of equity Ownership structure Capital structure Investing Table II. Jang et al. (2008) Capital Ashley et al. (2000). (2002b). Mao and Gu (2007). Lee ¨ zer and Yamak (2007). Guilding and Hargreaves (2003). (2007). Kim and Gu (2003). Gu and Kim (2003). Chen et al. (2008). Madanoglu and Olsen (2005). Gu and Qian (1999). Upneja and Dalbor (2001b) Upneja and Dalbor (2001a). Karadeniz et al. Jang and Tang (2009). Chen and Kim (2006). Singh and Kwansa (1999) Dalbor and Upneja (2002). Jang and Ryu (2006) Corgel and Gibson (2005). Rubelj (2006) (continued ) Risk and return Generic . (2005). Dalbor and Upneja (2004). (2008). Leung and Lee (2006). Denizci (2007). (2008). Chen et al. Jang and Kim (2009). Canina and Carvell (2008). O (2000). Kim et al. (2009). Upneja and Dalbor (2001a). Singh (2009b). Kim and Gu (2004). Tsai and Gu (2007b) Canina and Carvell (2008). risk Kim et al. Hospitality financial management studies (1998-2009) Borde (1998). Guilding and Lamminmaki (2007). Jang and Ryu (2006). Whittaker (2008) Lee and Upneja (2008). Singh and Upneja (2008). (2002a). Borde (1998). (2007). Oak et al. Tang and Jang (2007). Hsu and Jang (2008).IJCHM 23. Singh and exposure Upneja (2007). (2007). Gu and Kim (2002) Unsystematic Gu and Kim (2003). (2009). Hsu and Jang (2007).7 Major function Financing Area Debt Sub-area Generic Long-term debt Author Elgonemy (2002). Kim et al. Singh and Upneja (2008) Merger and Canina (2009). Tang and Jang (2008) Foreign currency Chang (2009). Kim et al. Yang et al.

the results. Youn and Gu (2009) Canina and Carvell (2008). plant. Erdem and Gursoy (2008). (2008). Upneja and Dalbor found a tendency for lodging firms to use more debt to fund growth. firm risk. Chi and Gursoy (2009). (2003). Jung (2008). (2009). Barber et al. 2. Lee. Diener (2009). (2009). Upneja and Dalbor (2001a). (1999). Kim and Gu (2006b). and fixed assets were all positively correlated. Dalbor and Upneja (2004) reexamined US lodging firms’ long-term debt decisions using five different growth opportunity proxies and a different sample. 2006. trade-off (i. Gu (2002). Kang et al. and fixed assets by the ratio of property. Kim and Gu (2006a). Upneja and Dalbor (2001b). supported the notion that the lodging industry is distinct in financing its growth with long-term debt. and depreciation tax shields negatively correlated with long-term debt. Madanoglu. Koh et al. Kim et al. firm risk by the probability of bankruptcy.e. Contrary to Barclay and Smith’s suggestion that firms with greater growth opportunities should use less debt. Chathoth and Olsen (2007a). They showed that growth opportunities. Lee and Park (2009). Tsai and Gu (2007b). .1 The use of long-term debt. Kim and Gu (2005). Madan (2007). particularly of long-term debt. McGehee et al. Park and Lee (2009). While the relationships between the five growth opportunity proxies and long-term debt decisions were mixed. Oak and Dalbor (2008b) Hospitality financial management 945 Financial condition and performance Bankruptcy Firm performance determinants CEO compensation and turnover Dalbor and Upneja (2002). Madanoglu and Karadag (2008) Table II. Gu and Choi (2004). debt capital works better for controlling possible agency problems (Dalbor and Upneja. Dalbor and Upneja (2004). (2001). Ketchen et al. Canina et al. (2009a). Tang and Jang (2007) also supported this finding. and free cash flow) proposed by Barclay and Smith (1995). 2008(b). Jang et al.1. This differs from restaurant firms (Upneja and Dalbor. Prasad and Dev (2000). Tsai and Gu (2007a). and equipment (PP&E) to total assets. Upneja and Dalbor (2001b) tested three hypotheses (pecking order. Madanoglu. In their study of US lodging firms’ debt choices. Youn and Gu (2007) Barber et al. furthermore. Mao and Gu (2008). They measured growth opportunities by the ratio of market value to book value of the firm’s assets (MVA). 2004). Koh et al. (2006). Kim and Gu (2009). Dalbor and Upneja (2007). Lee and Kwansa (2008). (2009b). Lenders likely feel more comfortable with real estate-type investments and with secured collaterals.Major function Dividend policy Area Sub-area Author Borde et al. To assess the appropriateness of using MVA as a proxy for growth opportunities. as claimed by the authors. The hospitality industry is capital-intensive and normally requires heavy debt financing. tax effects). 2001a) and other industries. (2009).. Hua and Upneja (2007).

g. 2. Older and more profitable firms with better cash flow seem not to need long-term debt (Upneja and Dalbor. Beals.. 2008). Both studies indicated that the lower quality of those firms (i. Jang et al. 2006). 2002) and lodging firms (Dalbor and Upneja.and long-term debt because of the operational uniqueness of restaurant firms.. regardless of the associated risks. Furthermore. 2007b).. Firm quality (or risk of going bankrupt) and size have been found to be significantly correlated to the long-term debt decisions of restaurant firms (Dalbor and Upneja. Dalbor and Upneja. Tang and Jang. Such firms should be able to negotiate more preferable debt arrangements. Jang and Ryu (2006) explained the unique financing behavior of restaurant firms. 2004. buildings. On the other hand. 2007. 2001a). they also claimed that restaurant firms . hotel firms may find it more convenient to expand using debt financing if they lack internal funding. which limits the types of assets to be financed (Upneja and Dalbor. 2004). short-term assets are more likely to be financed using short-term liabilities ( Jang et al. Larger firms tend to use more long-term debt because they can afford the higher fixed costs. They showed that firms with a high probability of bankruptcy use more short. Furthermore. While their study generally supported the four cross-balance sheet interdependencies as found in other industries.IJCHM 23.1. having a higher risk of bankruptcy) was probably caused by a higher level of long-term debt usage. The power of intangible assets such as brand equity cannot be overlooked when hospitality firms’ maintain or seek growth. 2001b). Nevertheless. favorable vs unfavorable). for example (Chathoth and Olsen.g. and properties have been found to use more long-term debt (Upneja and Dalbor. A good research question is whether or not traditional growth measures such as sales and asset growth can best reflect the growth opportunities of hospitality firms of different types (e. 2008). than their counterparts with lower fixed assets. short-term debt is negatively related to operating cash flow. 2001b. identification of appropriate proxies for growth opportunities in the hospitality industry still remains a research need and is critical because growth opportunities not only determine hospitality firms’ long-term debt decisions (Upneja and Dalbor. 2001b). and through investing in physical assets. This implies that restaurant firms should focus more on generating operating cash flow to replace or cover costly short-term debt.than long-term debt. so that equity becomes a much more expensive route of financing as market value increases. Upneja and Dalbor (2001a) argued that total debt should be examined along with short. because the latter can serve as collateral (Tang and Jang.7 946 Nevertheless. which corresponds to the principle of maturity matching between assets and liabilities (Stowe et al. This could be because hotel firms primarily expand by franchising. management vs franchised) under different economic situations (e. 2007) but also the liquidity of restaurant firms. Hospitality firms with more investment in fixed assets such as land. hotels vs restaurants) and different ownership/management structures (e. firm size was not found to be a significant determinant of lodging firms’ long-term debt decisions by both Upneja and Dalbor (2001b) and Tang and Jang (2007). While current liabilities are closely related to a firm’s liquidity and net working capital. In their study of the interdependencies between investing and financing decisions of US restaurant firms.2 The use of short-term debt. short-term debt financing is a relatively less-studied topic.g.e. 1980). In their study of restaurant firms’ capital structure. Hospitality firms in recent decades have noticeably expanded through management contracts and franchising agreements (excepting casinos.

Corgel and Gibson (2005) showed that for hotel firms. unrated firms could benefit from lower costs of both financing and financial distress. their study results contrast with previous studies’ findings that accounts receivable is highly related to accounts payable and that current liabilities usually finance operational assets.1. However.e. Jang and Ryu’s study was examined further by Jang and Kim (2009) to assess the firm size effect on restaurant firms’ financing behavior. 2008).to fixed-rate interest (Singh and Upneja. but their operating cash flows can be quite uncertain and can fluctuate significantly on a daily basis. First. casino firms rely heavily on cash transactions. Jang and Kim found that small and medium restaurant firms rely more on accounts payable whereas large firms use more long-term debts. while interest rate has been viewed and employed as a workable lever in signaling the monetary policy of an economy. unrated lodging firms that are more reliant on short-term debt in the form of floating-rate bank loans will find long-term fixed debt too costly.appear not to relate accounts receivable to short-term liabilities and that they finance their operational assets with stockholders’ equity in addition to accounts payable. wages and accounts payable). no investigation has examined how the hospitality industry has reacted to movements of interest rate in terms of Hospitality financial management 947 . smaller. The lack of research on short-term financing options in other hospitality segments suggests future research opportunities. firms with more floating-rate debt seem to be more likely to use derivatives to alter their exposure from floating. Singh argued that smaller. Insufficient cash flows generated from operating activities will likely trigger a need for short-term financing such as taking advantage of revolving credit facilities. Nevertheless. the reason behind the firm size effect on restaurant firms’ financing behavior remains unclear. Interest rate derivatives have been used by hotel firms to hedge against the risk exposure of interest rates. unrated firms are more likely to issue short-term debt and swap it into fixed-rate debt to reduce exposure to interest rate risk. 2. Interest rates determine the amounts paid and therefore are an important issue for firms making decisions about debt financing. Singh and Upneja (2007) indicated that both variable-to-fixed interest rate swaps and interest rate caps are used to hedge against rising interest rates. and its role associated with the hospitality industry could be further examined. 2007). However. the proportion of floating-rate debt has been found to be positively and significantly related to a firm’s decision to hedge (Singh and Upneja. larger and higher-rated firms tend to swap from fixed into floating-cash flow debt. In other words. Singh (2009b) also highlighted that small. By issuing floating-rate debt and swapping it into fixed-rate debt. it could also cause financial distress if debt financing is not properly arranged and monitored. and reduced exposure to interest rate risk. Additionally. The topic of interest rate has been extensively studied in mainstream economic and finance research. For example. the frequency of financial distress from floating-rate financing is less than or equal to that from fixed-rate arrangements.3 Interest rate. The labor-intensive nature of hospitality businesses and the system of trade credit both contribute significantly to their payables accounts (i. within which floating-rate debt is preferred. They suggested that hotel owners should focus on managing financial distress by aligning operating cash flow and debt-servicing obligations. and that long-term assets relate to stockholder equity among large firms but relate to supplier credit among small and medium firms. short-term liquidity is critical. On the other hand. Interest represents a tax shield benefit to a firm.

2008). and its growth and earnings potential. 2. an increase in the use of operating leases may signal deterioration in a firm’s financial health. empirical comparisons of leasing behaviors between different segments of the hospitality industry within the same economic situation could help further illuminate hospitality firms’ leasing decision-making. The level of the prevailing interest rate not only affects the selling price of a bond. rather than a purely alternative financing instrument. However. 1999). The level of operating lease use may affect how creditors and investors use available information to evaluate a firm. This could be another topic for further investigation. thus possibly affecting firm value and stockholder wealth. They also showed that the use of operating leases decreases as firm size increases but only up to a certain level. Firms in financial distress may find leasing a viable alternative to debt financing when acquiring equipment.. but also determines a bond investor’s yield to maturity (YTM). creating a need for future research on topics such as corporate bond issuance decisions.2 Leasing behavior Leasing requires minimum upfront costs to acquire assets and provides tax advantages for some firms (Upneja and Dalbor. Third. while the hospitality industry appears to increasingly rely on corporate bonds since the commencement of the century (Kim and Gu. A number of investors are entering the sales and leaseback transactions (SLBT) market that provides alternative sources of funding for hotel firms. The authors further indicated that firms that are closer to bankruptcy will generally choose operating rather than capital leases. Koh and Jang (2009) examined the determinants of using operating leases in the hotel industry and showed that hotels with fewer internal funds and/or higher debt ratios are more likely to use them. The interplay between interest rate movements and stockholder wealth deserves empirical exploration. Second. its financial condition. The mixed conclusions reached by the researchers of the two studies on the use of operating leases versus capital leases seem to relate to the type of industries under investigation. hotel operators obtain cheaper funding because of the increased supply of lease funds available in the market and might therefore appear financially healthy from a debt-equity ratio perspective. . Meanwhile.IJCHM 23. Kim and Gu’s study only examined financial determinants of corporate bond ratings of hotel and casino firms. An operating lease is considered to be a type of off-balance sheet financing. relatively less research has focused on how interest rate is related to bond issuance.7 948 borrowing or investing funds. In their study of the leasing behavior of restaurant firms. and both relate significantly and negatively to the use of operating leases. have been using SLBT as means of acquiring or growing their portfolios (Whittaker. after which use increases with firm size. a term that is becoming better known since the Enron collapse in late 2001. particularly private companies. Firms in good financial standing are less likely to use operating leases. In contrast to the restaurant industry. 2005). The authors argued that using operating leases could serve as a management strategy. Upneja and Dalbor (1999) showed that both beforeand after-financing tax rates are significantly and positively related to the use of capital leases. fluctuations of the prevailing interest rate could affect investors’ assessments of a firm’s intrinsic value resulting from their perceived investment risks (Keown et al. 2004). less financially distressed hotel firms are more likely to use operating leases as financing instruments. In other words. These investors.

The first three are posited to contribute negatively to the risk premium. Arguing for the unique operating characteristics of the lodging industry. ERP the equity risk premium. Madanoglu and Olsen (2005) proposed a theoretical model for estimating the risk premium using the following five constructs: human capital (Hcap). The sign of the relationship between IND and the risk premium remains unknown. However. 2001).3.e. The LAPM is stated as follows: À Á E ð RiÞ 2 Rf ¼ bi ERP þ ðsSMBÞ þ ðiBSIÞ þ ð pPOSÞ where E(Ri) is the expected return of a security i.g. it was popular with 65 percent of the Fortune 1000 companies in 1997 (Gitman and Vandenberg. and Starbucks) brand values have been evaluated by commercial firms such as Hospitality financial management 949 . the difference between the returns on portfolios of high. KFC. Second. Lee and Upneja (2008) compared traditional methods of estimating the cost of equity (i. their conclusion is limited for two reasons. brand strength index (BSI).e. and to SSI positively. compared to other traditional pricing models. BSI the brand strength index.3 Equity financing 2. Madanoglu. a short estimation period was used in their study. there seems to be no consensus in academic research on how brand strength should be measured for the lodging industry. but a higher expected return from the small portfolio when using the FF model.1 Cost of equity. While the two models produced seemingly conflicting results.2. the proposed framework needs further empirical validation to warrant its practical application. In estimating the size effect on the estimation of cost of equity for casual-dining restaurants. Considering the attributes that are particularly important for the lodging industry. Despite the limitations of and criticism towards the use of the Capital Asset Pricing Model (CAPM) in estimating the cost of capital. and POS the property ownership structure. Rf the risk free rate. They also argued that companies with higher brand strength and that invest in and utilize technology more efficiently will be able to achieve a lower cost of equity capital. 2000) and 60 percent of CFOs used it as their primary methodology (Graham and Harvey. First. 2001. They further introduced the Lodging Asset Pricing Model (LAPM) that incorporated two industry-specific variables to the Fama and French three-factor model excluding the HML (i. One potential issue is the measurement of the variables on the right hand side of the LAPM equation. the two models were not able to estimate the cost of equity for the 15-month period following September 11. the need for a hospitality industry-specific cost of equity model is justified. appears to have the merit of more appropriately estimating the cost of capital for the lodging industry specifically considering the intangible nature of its products and services. They showed that the price-to-forward earnings (PFE) using the ICE approach offers a more reliable estimation of the cost of equity for the lodging industry. The LAPM. McDonald’s. CAPM and the Fama and French (FF) three-factor model) with the implied cost of equity (ICE) method. For example.and low-book equity/market equity stocks) variable. technology investment and utilization (Tech). However. SMB the size factor. This lack of consensus exists despite the fact that some hospitality firms’ (e. safety and security index (SSI). and industry factors (IND). Erdem and Gursoy (2008) concluded that investors could expect a higher return from the large-firm portfolio using the CAPM.

high liquidity. Prasad and Dev. The relationship between institutional ownership and firm performance in the restaurant (Tsai and Gu. March 3. 2001) and hotel (Gu and Qian. pension funds. Oak and Dalbor’s study suffered from the oversight of possible endogeneity between the ownership and performance variables. Studying the “Monday effect” on tourism stocks.2 Ownership structure. 2007a) and casino (Tsai and Gu. Considering the possible ownership endogeneity issue and applying both the ordinary least square (OLS) and two-stage least square (2SLS) approaches.g. 2004) stated that there is no reason to expect small firms with highly concentrated ownership structures to perform better or worse than large firms with more diffuse structures. conclusions from Gu and Kim’s and Gu and Qian’s studies require further validation addressing the above-mentioned shortcomings. nor did they address the possible endogenous relationship between ownership structure and firm performance. and could help improve accounting profitability and equity owners’ returns. Both studies used multiple accounting measures (i.IJCHM 23. and brokerage firms were also examined in their study. 2010) and that a few hotel brand equity studies (e. Institutional investors’ preferences for lodging stock investment were examined by Oak and Dalbor (2008a). and high growth opportunities. They argued that by attracting more institutional investors.3. 2003. 1999) industries. For example. empirical studies in mainstream finance mainly support a positive relationship between ownership structure and firm performance. As a result. Nevertheless. return on equity (ROE) and return on assets (ROA)) and stock returns as firm performance proxies and concluded that managerial ownership could be a proxy for the convergence of interests between managers and owners. personal communication. the regression coefficients obtained in these studies could be biased and their conclusions are potentially challengeable..7 950 Interbrand (Interbrand. neither study considered other affiliates such as creditors within the agency framework. banks prefer lodging firms with low book-to-market value ratios. However. both . 2007a). several studies have been conducted on institutional investors. whereas insurance companies favor those with high capital expenditure-to-asset and high debt ratios. Kim et al. This relationship has been examined using multiple regression analyses to reveal significant and positive relationships between managerial shareholdings and firm performance for both the restaurant (Gu and Kim. Therefore. Furthermore. Although Demsetz (Harold Demsetz. 2007b) industries has also been studied. and as a result. 2. 2000) have been conducted. different types of institutions favor firms with different financial characteristics.e. the volatility of tourism stock returns is reduced and the required rate of return for shareholders is lowered. Leung and Lee (2006) showed that stocks followed by fewer institutional investors can cause negative Monday effects and that the Monday return of a stock is positively correlated with its institutional shareholdings. Mutual funds. The increasing importance of institutions in the hospitality industry can be observed from the growing volume of equity that they control (Tsai and Gu. While institutions generally prefer large firms. One central issue for equity financing is the topic of ownership structure and its impact on corporate governance and firm performance in light of the agency relationship. the determination of the size factor could be challenging because many lodging firms expand through management contracts and franchising agreements in addition to investing in physical assets as noted above.

Owners-managers’ personal values influence their strategies and ultimately their firms’ performance. such as social prestige. 2007). which could help improve ROE.than outside-manager firms. Future studies could investigate the interplay of privatized enterprises with the state and the implications for firm performance and corporate governance. they argued that institutional investors and creditors could substitute for each other in their monitoring roles with respect to management in corporate governance. the high risk of default pushes up the lending rate higher while increasing the interest costs (Madan. free cash flow. (2007) found that the profit margin in restaurant firms depends on the level of ownership percentage and management type. or profitability Hospitality financial management 951 . Furthermore. it is higher for owner. 2. larger. these corporations are still significantly influenced by the state. and more profitable firms with low financial leverage. Despite their privatized status. If a firm’s profits are low. The ownership structure of a firm is a complicated issue.4 Capital structure From a financial perspective. In comparing the determinants of capital structure between US software and lodging firms. A number of state-owned enterprises in China underwent privatization through share reform since the late 1990s. and there are now more types of ownership in Chinese corporations than in their Western counterparts. Skalpe (2003) argued that accommodation providers and restaurant keepers have aims other than maximizing returns. Another market worth investigating is China. 2009). Kim et al. and stock options could be interesting research topics in this field. Ownership-related issues such as block holdings. They also showed that institutional investors tend to invest in better performing. Madan (2007) also argued that firms with low share capital but high reserves and debt should either use their accumulated profits or issue fresh capital when contemplating expansion. Of particular interest is institutional shareholding in the casino industry due to its strict regulation of significant shareholdings and the potential influence on corporate governance. along with environment risk and corporate strategy. Facing high financial risks and volatile operating environments. however. A disadvantage of high financial leverage is the higher borrowing cost associated with debt facilities and the resulting default risk. capital structure is one of the most important determinants of a firm’s sustainable growth (Madan.. helps explain a significant amount of the variance in firms’ performance. Profit margin is lower for owner-managed firms when the primary ownership percentage is under 50 percent. Profit margin decreases as the level of primary ownership of the owner-manager decreases. family holdings. This could influence a firm’s strategic direction and its long-term bottom line.studies showed that institutional ownership has a significant impact on performance for both casinos and restaurants. The latter approach should help control their gearing ratio and reduce investors’ perception of risk. Chathoth and Olsen (2007b) showed that capital structure. 2007) because it relates to the cost of capital or the required rate of return for the firm. firm size. The level of various ownership types might affect corporate governance and the involvement of owners in firm management. it is important for lodging firms to determine the composition of their capital structure and the factors affecting leverage decisions and debt ratios (Karadeniz et al. Tang and Jang (2007) showed that lodging firms’ leverage behavior did not significantly respond to earning volatility.

compared to possible asset structure variations (Andrew et al. They also suggested that the maximum profitability. tangibility of assets. while family majority ownership is a significant factor in explaining asset utilization (Kim et al. Karadeniz et al. can be inflated by increasing the level of international diversification. non-debt tax shields. ¨ zer and Yamak (2000) examined the financial sources used by small hotels (less O than 100 rooms) in Istanbul. previous studies related to capital structure focused on examining the consequences of different levels of capital structures.g. strategies are a more direct and efficient way to achieve higher profitability. while free cash flow. Jang and Tang (2009) indicated that a firm’s financial leverage has a direct inverted U-shaped relationship with profitability and argued that financial. contributing to both the hospitality financial management field and mainstream finance literature. They showed that such firms use internal funds and debt in their investment stage. be reached by establishing an equilibrium between the advantages (e. given that the liquidity and debt ratio of such firms is lower than average. There exists little. This could be an interesting topic to explore. However. growth opportunities. Financial leverage has a positive relationship with the interaction between ownership percentage and single-family majority/minority ownership.. tax breaks) and disadvantages (i. External debt appears to be negligible. 2007). (2009) found that effective tax rates. in theory. In other words. Lee (2007) suggested that changes during specific economic periods do not reflect an industry-wide practice for determining the capital structure of lodging firms. Therefore. and ROA are negatively related to the debt ratio of lodging firms. owner-operators have higher liquidity than franchisers.e. Canina and Carvell (2008) reported that in terms of type of restaurant operations. Neither strategic nor financial decisions can be mutually isolated to improve financial performance. Financial leverage for single-family majority and minority firms will be different depending on the ownership percentage of the primary owner. and retained earnings at the operating stage. corresponding to optimal leverage. Chathoth and Olsen (2007a) showed that smaller firms report higher ROE than bigger firms when economic risk is lower and market risk is higher than for the average firm. a firm can increase the positive impact of the former by increasing the latter. financial distress and bankruptcy-associated costs) of debt usage. 2007). . Also in the Turkish context. Neither the trade-off nor the pecking order theories seem to explain the capital structure of Turkish lodging firms. there are few empirical studies of this topic in hospitality firms.7 952 because they neither increased nor decreased their debt-financing costs. room for hospitality firms to develop or invent unique or competitive capital structure tactics. if any.. and can buffer more effectively between their short-term financial obligations and their cash on hand to meet these obligations. Jang and Tang (2009) stated the importance of careful control of a firm’s financial leverage at an optimal level. owners do not even consider bank loans due to the difficulty of finding credit and the high costs of doing so.IJCHM 23. and firm size have no relationship with debt ratio. Their financing options are limited because they normally lack the professionalism and collateral to obtain credit. Sharma (2007) showed that very small hotels (about 25 rooms) in Tanzania obtain most of their funds through personal sources or commercial banks. rather than business. net commercial credit position. Although an optimal capital structure might.

and benchmark comparisons (Guilding and Lamminmaki. given the expected growth in spending on fitness. The overall differences in minimum loans between large. pension funds. and a preference to wait for more states to legalize gaming (Singh and Kwansa. 1994).5 Evolution in hospitality financing During the 1990-1991 recession. pension funds and life insurance companies became major sources of direct-equity capital for lodging real estate. For example. Tsai and Gu. which was taken private in 2007 by Cascade Investment and Kingdom Hotels in a deal worth almost US$4 billion. practices. the notion of “if you build it. 1994). restaurant. one major buyout was that of the Four Seasons Hotels. Rubelj. From a firm perspective. small lenders can provide a minimum of US$1 million while large lenders will offer US$5-10 million. and their involvement and interactions with firms and their management could be investigated further. namely the firm and its investors. 1999). Singh and Kwansa’s prediction for casino hotel financing underestimated the growth potential of the casino (hotel) industry. and recreation. Tsai. 2002. 1999).05 billion in 2006 by a private-equity firm owned by Apollo Advisors and TPG Capital. Continuing support from institutional investors can be expected. The importance of institutional investors to the hospitality industry has been heightened because they now control a significant portion of lodging. 2007. Harrah’s was acquired for US$15. restaurants. renovations of guest rooms. 2007b). 3. Recovery had begun by late 1992 and the industry became profitable again in 1993 (Block. 2007a. 2002). Hospitality investing Activities related to hospitality investing can be examined from two perspectives. so there is a need for such evaluation. Different types of financial institutions can finance different types or modes of hospitality firms. research has provided capital budgeting guides. Issues related to the operations. lobbies. but a relatively low chance of being involved in casino hotels due to overbuilding. 2005. having overbuilt room inventory in the late 1980s (Hotel & Motel Management. and casino equity (Hotel & Motel Management. Tsai and Gu. and small lenders have been progressively narrowing. In the hotel industry.2. For example. funding from increased institutional investment (Hotel & Motel Management. resort hotels have a high probability of borrowing from large lenders. For example. as could the possibility of differences in ownership structures and involvement in management and corporate governance in countries and regions other than the USA. although a majority of published studies focus on the latter.4 billion management-led buyout. 1998). intermediate. high cost of construction. management. Life insurance companies and pension funds have a high to moderate probability of financing convention hotels. and performance of these firms after the buyouts have not yet been examined. leisure. The importance of private funding in the marketplace is expected to continue playing an important role in hospitality capital (Elgonemy. they will come” seems to have held since the mid-1990s. Singh and Kwansa (1999) suggested that changes in the minimum loan sizes offered by financial institutions are clear indications of the competitive landscape that is expected to prevail. and other public spaces were initiated using available cash flow and. more importantly. the hotel industry suffered from low occupancy rates. and life insurance companies became the largest purchasers of lodging company stocks (Singh and Kwansa. in the casino industry. meeting rooms. As a result. This was followed in 2007 by Station Casinos’ US$5. Along with improved profitability and performance. Guilding and Hospitality financial management 953 . while mutual funds. 2006.

Treynor ratio. Canina and Carvell (2008) showed that restaurant operations or franchising have high levels of short-term financial risk in terms of liquidity measures. 3. the full-service restaurant segment had the lowest total risk.e. Regarding the formalization of capital budgeting systems and investment techniques. among others. appraise capital expenditure projects and make informed decisions that will bring value to the firm and shareholders. For example. Focusing on casual-dining restaurants alone. Mao and Gu. as measured by standard deviation. ROA outperforms ROE in estimating lodging firm performance in terms of its relationship with financial risk. Madanoglu. Skalpe. Lee and Kwansa (2008) confirmed that a casual-dining portfolio allows investors to earn a higher return for a lower level of risk compared to the fast-food segment. 2002. Madanoglu. 2008. Sharpe ratio. Mao and Gu (2007) investigated the risk/return relationship in various industries of the hospitality sector during the economic downturn of 2000-2003. followed by full service and economy/buffet. The results of Mao and Gu’s (2007) study contradict the traditional wisdom that risk and return go hand in hand. The hotel/motel industry had the weakest performance but highest risk. the fast-food segment was ranked as the best performer. 2003. In examining the relationship between four financial risk factors and future performance as measured by ROA and ROE. hotels are less developed in reviewing required rates of return and in applying post-completion audits.IJCHM 23. However. Skalpe. Ashley et al. Treynor and Jensen) and contemporary risk-adjusted performance measures (e. 2003. Lee and Kwansa. the Sortino ratio and Fouse Index).7 954 Hargreaves. and Jensen index).1 Risk and return Examining the restaurant industry in detail and categorizing it into three types (full service.. Kim and Gu. Damitio and Schmidgall. they employed both traditional risk-adjusted performance measures (i. Much of the risk related to hotel and restaurant investment is unsystematic (Kim and Gu. Lee (2008a) found that strategic and stock performance risk factors represent a lodging firm’s financial risk better than bankruptcy and firm performance risk factors. in terms of three risk-adjusted performance measures (i. Kim and Gu (2003) showed that over the period 1996-2000. 2003). The casino/gaming industry was found to have the highest return with medium risk. a higher level of risk should be compensated by a higher level of return. 2008. Furthermore. . Madanoglu. 2003. Other studies of the risk/return relationship present similarly contradictory results (Borde. followed by the restaurant industry with mediocre return but lowest risk. 2007. Erdem and Gursoy. fast food and economy/buffet). as suggested by the CAPM. the Sharpe ratio.e. 2003). if the investor is risk-averse. In their study. Sharpe. 2000). That is. Four portfolio performance indexes (the Treynor index. 1998. Guilding and Lamminmaki (2007) demonstrated a positive relationship between hotel size and the use of financial investment appraisal techniques. Erdem and Gursoy (2008) found that large restaurants outperformed their smaller counterparts on a risk-adjusted basis during 1998-2002. Studies from the investors’ perspective are more diverse and include topics such as risk and return and performance measurement. and appraisal ratio) were estimated to measure the firms’ risk-adjusted stock performances. Capital budgeting relates to how firms respond to their operating and business strategies. strategic and stock performance risk factors each have a significant and negative predictive ability for future performance as measured by ROA. On the sector level.g. Madanoglu. Jensen index.

e. Studying hotel REITs’ risk features. However. 2008). Kim et al. Future research could meet this need if empirical data become available. The positive correlation between debt ratio and beta suggests that using less debt and pursuing conservative growth could reduce systematic risk for hotel REITs. 2002)..2 Unsystematic risk. large hotel REITs Hospitality financial management 955 . The dividend payout ratio is negatively related to both systematic and total risk (Borde. Although synergy may enable large hotel REITs to benefit from low operating and capital costs. Gu and Kim (2003) indicated that hotel REITs’ unsystematic risk is associated positively with debt and dividend payouts but negatively with capitalization.3.1 Systematic risk. Barber et al. Furthermore. Echoing Gu and Kim (2002).. in studying hotel real estate investment trusts’ (REITs) beta (i. 1998. Using financial data from 75 US restaurant firms from 1996-1999. That is. as compared to that for a firm’s stock. leverage seems to be unrelated to either systematic or total risk since it has little influence on market-based risk measures. The estimation can become even more complicated when the impact of financial leverage is included (Van Horne. which could increase risk. (2008) showed that efficient use of existing restaurant assets is the key to risk reduction and value enhancement. 2008). Gu and Kim (2002) applied weighted least-squares regression analysis to examine systematic risk determinants. Restaurants with a high level of operating risk are likely to distribute a smaller fraction of their earnings than those with lower risk. Estimation of the systematic risk for a capital investment. which further affects the calculation of the cost of equity and capital. Barber et al. Liquidity level is positively related to both systematic and total risk (Borde. systematic risk) determinants. Firms are typically reluctant to vary their dividend payouts significantly once a certain level has been established. Dividing risks into systematic and unsystematic. 3. especially if this means cuts. (2002a) found that 84 percent of their total risk could be attributed to firm-specific. whereas director turnover could increase it (depending on a firm’s state of development). Barber et al. or unsystematic. For example.. High efficiency in generating sales revenue helps to lower systematic risk while excess liquidity tends to increase it. and exploring their determinants in the hospitality industry. They argued that properly investing excess cash flow in operating assets and high asset turnover could lower systematic risk.1. They showed that restaurant systematic risk correlates negatively with asset turnover but positively with quick ratio. while the negative relationship between capitalization and beta suggests that they have lower systematic risk and are less sensitive to market movements. risk. can be quite challenging because there might not be existing or historical references available.1. has been a popular research topic. The proportion of unsystematic risk in the total risk of hotel REITs is higher than that of other US stocks. Kim et al. No published studies exist that assess the appropriateness of using various methods of estimating the systematic risk for a capital investment as suggested in finance textbooks. (2002a) showed that systematic risk is correlated positively with debt leverage and growth but negatively with firm size as measured by capitalization. geographical diversity can help them achieve revenue stability (Kim et al. and are not invested in high-earning operating assets. 2002a). High liquidity may imply that available resources are being invested in marketable securities. hotel REITs with higher debt leverage could be subject to greater stock volatility when firm-specific events occur. 1998.

2009). ROA increased more quickly in C-corporations for the same amount of increase in payout. Various currencies. 2007).7 956 are less risky in terms of unsystematic risk. because of extra cash from depreciation. unsystematic risk is firm-specific. Singh and Upneja. 2007. The authors suggested that consolidation. They showed that the foreign sales ratio and diversification measures of a firm provide weak evidence for their use of derivatives. Higher dividend payout could increase unsystematic risk. such as the Australian dollar. Occupancy may decline in strong currency environments. (2009) found that consumer-based brand equity has a stronger role in predicting firm-specific unsystematic risk than systematic risk. firms have less incentive to take this approach if they have enough internal cash flow to cover fixed claims and fund future investment (Singh and Upneja. more profitable hospitality firms suffer less unsystematic risk. That is. 3. They suggested that the relationship between profitability and dividend payout might be nonlinear. Although about 60 percent of foreign exchange risk exposure could be attenuated or even eliminated (Chang. Previous studies focused on examining the relationship between a firm’s unsystematic risk and its financial features.3 Foreign currency risk exposure. For example. via mergers and acquisitions. Chinese yuan. the only significant variable affecting the ROA of hotel REITs and C-corporations is the different dividend payout. have experienced volatile fluctuations in recent years and the gain or loss from such . ownership diversification. and the resulting loss could be compensated for by gains in exchange. Tang and Jang (2008) compared hotel C-corporations and REITs in terms of the profitability impact of their requirements and showed that the latter pay less tax and have higher levels of fixed assets. and managers can make up for currency loss by increasing the average daily rate (ADR) without reducing occupancy. 2008). and dividend payout ratios. However. Financial and operating leverage and firm size are also significantly associated with the unsystematic risk of the hospitality firms studied. Their results also suggest that the market reacts more strongly to firm-specific events affecting hotel REITs paying higher dividends. Hotel REITs not only pay more dividends than required but can also pay more than their net income. and that hospitality firms with higher growth opportunities will use derivatives more. because either the amount is immaterial or it is not cost effective to use derivatives (Singh and Upneja. implying that this decreases free cash flow associated agency costs faster than for hotel REITs. Moreover. Comparing the unsystematic risk determinants of the hotel and restaurant industries. very few hospitality firms manage such risk. could quickly increase a hotel REIT firm’s market capitalization and consequently help reduce unsystematic risk. and Japanese yen. and hotel REITs must carefully consider the effect of this on investment capital and financing mix. Hsu and Jang (2008) showed that profitability is the most influential factor. A weak local currency may threaten dollar-denominated earnings. The authors argued that large hotel REIT firms paying lower dividends and using less debt are likely to have a valuation advantage. Rego et al.1. Foreign exchange fluctuations are an important determinant of risk for hotels operating internationally. and on unsystematic risk. Singh and Upneja (2007) suggested that few lodging firms use derivatives such as forwards to hedge against foreign exchange risk exposure. However.IJCHM 23. and future studies could explore how nonfinancial features of a hospitality firm relate to its unsystematic risk.

. given the economies of scale available to a business with high cash-flow volatility. 2008). As well as including financial variables when measuring this relationship. As pointed out by Canina (2009) and Yang et al. 2009b. 2008). such Hospitality financial management 957 . manager. Many hospitality firms use a mix of short-term floating and long-term fixed debt to mitigate their risk exposure (Singh. Research on risk and return research can be expected to develop further. as investors weigh costs and benefits in response to an ever-changing business environment. future studies could include nonfinancial variables and consider the interplay of the parties in the agency framework. Underinvestment costs.noticeable currency fluctuations might no longer be viewed as immaterial. 2008).4 Interest rate risk exposure. along with yield spread and debt rating. resulting in reduction of expenses and the cost of capital. 2007). 2009b. Interest rate exposure. Market-to-book ratio significantly affects the amount that lodging firms hedge (Singh and Upneja. cash-flow volatility. the major benefits to owners. While the prevailing interest rate has been set at historical low because of the most recent global financial crisis. Larger firms are more likely to hedge. 2009a) and to achieve an optimal debt ratio in aligning the supply of internal funds from operations and borrowings to match demand for investment funds (Singh.1. The increasing complication of the agency framework (including lender. 2007). 3. Interest rate risk represents the most significant source of market risk for many lodging firms (Singh. and foreign sales ratio are important determinants of interest rate exposure. information asymmetry. Singh (2009a) showed that firm size. A significant and negative relation between the use of derivatives and interest rate exposure implies a reduction in risk as the magnitude of derivative use increases. There appear to be no studies that explore how restaurant firms purchase futures on commodities to protect themselves against fluctuation in food and beverage costs. proportion of floating-rate debt. interest coverage ratio. is a significant determinant of a firm’s interest rate derivative positions (Singh. Case studies of the impact of currency fluctuations on those hospitality firms investing and operating internationally could reveal the cost and benefit of managing currency risk.2 Mergers and acquisitions There has been a long history of mergers and acquisitions (M&A) activities in the hospitality industry (Andrew et al. book-to-market ratio. and owner) further challenges traditional thinking about the positive relationship between risk and return. However. (2009). foreign sales ratio. shareholders. 2007). and firm size are all significant determinants of hedging decisions (Singh and Upneja. managerial risk aversion. The goal of M&A is to improve overall performance and contribute to the realization of shareholder value maximization (Hsu and Jang. financial distress costs. floating-rate debt. Two main sources of this risk are debt obligations and financial investments. Another possible issue for future research into hedging is commodities. Singh and Upneja. Studying lodging firms’ use of derivatives in managing interest rate risk exposure. it would be interesting to observe how hospitality firms react to or hedge against foreseeable interest rate hikes in the years to come. along with environmental risk factors. and institutional investors are economies of scale and synergy. 3. Most interest rate exposure comes from floating-rate bank loans because changes in rates can increase the volatility of cash flow and earnings in an uncertain interest rate environment. Singh and Upneja. 2009b).

There is growing recognition that all expected value creation. more empirical studies of the hospitality industry could explore why so many firms continue to pursue the M&A strategy despite disappointing results as noted in Canina (2009) and Hsu and Jang (2007). involving significant capital and leaving virtually no room for failure. Some M&A activities in the casino industry (e.. Chen. money supply and unemployment rate have been shown to significantly explain the movement of hotel stock returns (Chen et al.g. natural disasters. Although 75 percent of hospitality acquisitions are cash financed (Oak et al. 2007). with failure usually occurring when firms attempt to combine operations.3 Hospitality stock investment Investors in hotel stocks care not only about risks and returns but also the determinants of volatility. Furthermore. For instance. higher growth resource imbalance. performance deteriorated after merger. (2009). Mergers also failed to generate better ROA or ROE for the acquiring firms. (2009) showed that stock offers are preferable to acquirers’ equity value overall. takes place after acquisition rather than at the initial stages (Canina. Canina (2009) showed that over two-thirds of M&A deals fail to create shareholder value. Oak et al. 2007). greenmail and poison pills) that could be employed by management to avoid hostile takeovers (Andrew et al.. In their study of 15 acquiring firms using market measures and 23 firms using accounting measures. but also there were additional reductions in long-term profitability. 2008). and larger size are found to be a more likely target for M&A (Kim and Arbel. 2006.’s empirical review of 19 hospitality M&As showed that acquirers received positive abnormal returns 12 months post-merger. 2007). higher capital expenditure ratio. 2005. Yang et al. the topic of hostile takeover could be investigated. using industry indices over the period 1996-2007. However. Additionally. Because M&A has been one of the fastest ways that firms expanded in the last decade. 2009). Hsu and Jang (2007) found no evidence that M&A benefited firm performance measured by short.7 958 expectations are less often realized due to issues with corporate culture or leadership conflict. and international sports events have a more significant impact on hotel stock returns than macroeconomic factors. Furthermore. 3. Not only did equity value decline in the long term.or long-term stock returns and profitability. (2005) indicated that non-macroeconomic variables such as political events. MGM Mirage’s acquisition of Mandalay Resort Group in 2005) could be a good case study for understanding this phenomenon. Hospitality firms with a lower price-to-book ratio. Furthermore. a . no significant relationship was identified between merger announcements and change in short-term equity value. hotel stocks exhibit higher mean return and reward-to-risk ratio during expansive monetary periods. Changes in unemployment rate reflect the strength of the economy and significantly correlate with hotel stock returns in restrictive monetary periods in Taiwan (Chen.g. the findings of Yang et al. 1998).IJCHM 23. The increase in money growth results in a wealth effect. if any. Chen et al. indicate significant long-term positive gain for acquiring firms. From a macroeconomic perspective. An increase in unemployment symbolizes a sluggish economy and is accompanied by a decrease in stock returns. (2008) further showed that acquiring firms with a higher debt ratio are more likely to use cash than stock payments. It would be interesting to investigate the tactics (e. Chen and Kim.. Yang et al. which in turn tends to stimulate consumption and production and increase investment.

such as contract loss and earnings alerts. Hospitality stock prices driven by EPS exist because the industry is involved in less noise trading and is smaller compared to other industries in terms of market capitalization. They also demonstrated a long-term relationship between stock prices and EPS. 4. While advanced mathematical models (e.study of Taiwanese hotel stock performance after the SARS outbreak by Chen et al.. She found that repricing firms are significantly smaller (in terms of market capitalization) and have lower stock price returns and dividends per share.. (2008) demonstrated a significant and positive relationship between earnings manipulation indicators and stock price increases for restaurant firms. 2003). That is. Denizci (2007) showed that hospitality companies are more likely to reprice stock options after a stock price decrease accompanied by a market-wide fall. Repricing stock options can also send certain messages to investors. For example. whether rational or not.g. 2009). The authors argued that hospitality stock investors should pay more attention to underlying performance in terms of EPS. They advised that hotel REITs must be very cautious about the financial risk associated with debt leverage and the negative impact of new equity issues. Using logistic regression analysis to examine the financial features of firms that did and did not pay dividends. Similarly. because the volatility of investment values can be attributed to many factors using either technical or fundamental analysis. 2009) have been introduced and tested with empirical data to offer investors some guidance. Kim et al. Hospitality stock investment is rather complicated. Future studies could also study hospitality stock investment qualitatively to explore the relevant factors. (2002b) argued that hotel REITs are no more attractive than other REIT sectors because oversupply and low occupancy rates since 1997 have greatly hurt their stock returns and increased volatility. 2007. High debt leverage could greatly increase investment risk because of uncertainty about a hotel REIT firm. Earnings per share (EPS) has been shown to serve as a good proxy for the fundamental value of stock prices in the hospitality sector (Chen et al. Upneja et al. Chen et al. and that EPS significantly predicts changes in stock returns for the hospitality industry. Kim and Gu (2009) showed that firm size (measured by total assets) and profitability (measured by ROA) are significant drivers of dividend payout Hospitality financial management 959 . This was considered an irrational market response because decreasing occupancy and average daily rate caused panicking hotel investors to perceive an abnormally higher risk and sell off shares that were considered overvalued. individual judgment. particularly if firm-specific events occur. (2007) showed that the industry experienced the most serious damage in terms of stock price decline (approximately 29 percent) in the immediately following month among many industries on the Taiwan Stock Exchange. Hospitality dividend policy Firms reward investors through cash or stock dividends or stock price appreciation. that may cause a drastic decline in stock (Gu and Kim. it should be noted that stock price movements reflect investors’ predictions and speculations for a firm’s future. plays an important role in investment decisions. Chen et al. Tsai and Gu (2007c) argued that the interplay between stock market investment and casino gaming activities is a result of wealth and substitution effects. compared to a control sample of companies matched by size and price decrease..

earnings). 5. so the market reacts positively. 2004) industries. and/or high interest payments. (1999) cautioned that changes in dividend policy could affect the availability of capital to fund growth. which triggers dividend payments. cutting or reducing dividends could displease investors even if it means growth opportunities are ahead. Dividend policy changes could be an interesting topic for research. Hospitality firms’ dividend policies have been far less studied than their financing and investment. These results are consistent with those of Borde et al.7 960 decisions for US firms.. most likely due to REITs’ committing a fixed percentage of earnings paid out as dividend. While paying out more dividends would please stockholders. (2008) confirmed that . (2001) on investment opportunities and profitability (i. Canina et al. Oak and Dalbor (2008b) found that institutional investors tend to prefer REITs. stock price appreciation. Financial conditions and performance 5. Equally. Canina et al. 2009). signaling low growth. especially when there is a financial shock. Dividend initiations and increases imply an appreciation in firm value. Jang et al. (2001). In other words. highly volatile income. Comparing lodging corporations and REITs in terms of the impact of dividend policy on institutional shareholdings. Borde et al. They argued that the latter could be a substitute for interest payments and serve as a mechanism to constrain management within the agency framework. Dalbor and Upneja (2007) found a negative relationship between total debt and dividend payout in the US restaurant industry and a positive relationship between firm size (measured by number of shareholders) and dividend payout. An example of this occurred during Formosa International Hotels Corporation of Taipei’s capital reductions in 2002 and 2006 (Taipei Times.. However. and increases in other performance measures such as ROE. including both interest and principal payments. the market reacts negatively to announcements of dividend decreases (Borde et al. (2001) argued that the average dividend payout for lodging firms is less than for other firms in the market due to higher investment requirements. 2001). it could also indicate that the firm has few or no value-creating opportunities ahead. Smaller and less profitable firms with more investment opportunities are less likely to pay dividends because they need to retain earnings to pursue growth. firms are under significant pressure to generate enough operating cash flow to meet short. 1999. sensitivity to the economy. (1999) and Dalbor and Upneja (2007) in terms of the effect of firm size on dividend payout decisions and those of Canina et al. and insolvency has become a popular research topic.e. larger firms with higher profitability but fewer investment opportunities are more likely to pay dividends. while investment opportunities deter them from paying. Dalbor and Upneja. as could capital reduction.and long-term debt obligations. firms might need to seek funding in the capital market if unforeseen opportunities emerge. Firms that fail to do so face various consequences including bankruptcy. and seasonality. Similar to Canina et al. 2002) and lodging (Upneja and Dalbor.IJCHM 23. While investors perceive higher payouts positively. How firms utilize operational earnings sends different messages to their investors. More leveraged firms are more vulnerable to failure.1 Bankruptcy Given the sector’s capital-intensive nature. The probability of bankruptcy is positively correlated with long-term debt in both the restaurant (Dalbor and Upneja. 2001b.

2 Firm performance determinants Firm performance has been a popular research variable. 2007b). debt-burdened) are candidates for bankruptcy. Canina and Carvell (2008) argued that Hospitality financial management 961 . asset turnover. profitability. They stated that interest coverage is the most important signal of business failure in the Korean hotel industry. and the higher the probability of failure. 2006b) and Youn and Gu (2009). the more a firm relies on debt financing. implying that heavy indebtedness tends to reduce firm value in the capital market. Comparing Gu’s (2002) multiple-discriminant analysis model of restaurant bankruptcy. institutional shareholding and firm size are significant and positive determinants of firm performance (as measured by a proxy for Tobin’s q) in both the restaurant and casino industries. Depending on the context. while debt has a positive performance impact on the latter only (Tsai and Gu.than long-term debt are more likely to go bankrupt. performance. most likely due to a greater problem with information asymmetry. the lower the interest coverage ratio. Diener (2009) explained the regulatory changes in the bankruptcy code since the last wave of hotel bankruptcies and suggested that the precipitous and concurrent drop in real estate values and revenues has again raised the specter of insolvency for owners and lenders. Upneja and Dalbor (2001a) showed that restaurant firms with more short. and faster growth. and taxes could influence this. They concluded that larger firms. 2004). Financial leverage has a significant but negative effect on restaurant firm performance. it can be measured from the accounting (such as ROA) and finance (stock returns) perspectives. Comparing a logistic regression model predicting the failures of Korean lodging firms. such as utilities. the higher its interest expenses. Hospitality researchers have been interested in what financial attributes lead to better performance. Kim and Gu (2006b) argued that what matters in restaurant bankruptcy is long-term debt. Mao and Gu (2008) indicated that financial leverage and activity are significant determinants of performance (as measured by a proxy for Tobin’s q) of US restaurants. From the accounting perspective. as could owner-debt relations or favorable economic factors. While some financial variables clearly signal firm failures and have been well examined in previous studies. Using a multiple-discriminant analysis model. He argued that many other issues. Tsai and Gu. Gu (2002) showed that restaurant firms with lower earnings before interest and taxes and higher total liabilities (i.e. For example. tend to have higher values. This argument was supported by Kim and Gu (2006a. with higher liquidity. critical vendors.lower leverage and higher cash levels can reduce the risk of insolvency. or a combination of both (such as Tobin’s q). 5. there is need for further investigation of non-financial issues related to hospitality firm bankruptcy. Jung (2008) proposed the application of the Du Pont ratio for operators to identify the true value drivers and simultaneously the use of the WACC as the benchmark for performance. Youn and Gu (2009) showed that the artificial neural network model outperforms the logistic model in terms of reduced Type II errors. although both models give similar results. ultimately. However. Kim and Gu (2006a) argued that nonfinancial factors such as geographic diversification and market segmentation may also help predict bankruptcy because they are likely to influence the firm’s financial variables and. Kim and Gu (2006b) claimed that the logistic model is preferred because of its theoretical soundness. 2007a. such as those that have been conducted in mainstream business (Wu.

3 Chief executive officer compensation and turnover Performance-related pay (PRP) has been another research area because it relates to the agency theory in terms of aligning the interests of owners and managers. as mediated by customer satisfaction. 5. They claimed that the higher the customer satisfaction. but no impact on firm performance. In examining CEO cash compensation determinants in the US restaurant industry. as measured by asset turnover. might be less useful in assessing a firm’s ability to cover current obligations. where there is no market price data available.. an insignificant positive association between stock options and stock performance suggests that the former could drive the latter.7 962 static measures of liquidity. 2009. PRP is not in evidence with respect to profits and stock performance. debt leverage. and stock options but negatively associated with revenue efficiency. Barber et al. Kang et al. Corporate social responsibility (CSR) activities show a positive and simultaneous relationship with firm value and profitability for hotel companies (McGehee et al. which indicates otherwise. Koh et al.. However. 2007). Their results contrast with those of Kim and Gu (2005) because they found a positive but weak correlation between CEO compensation. the better the firm performance. only firm size (measured by the log of total assets) and operating efficiency (measured by asset turnover ratio). negatively affecting ROA. such as internationalization (Lee. the findings of Park and Lee’s (2009) study of the restaurant industry contradict this. indicating a key internal performance-enhancing success factor for any service company. The authors claimed that stock price is a significantly stronger predictor of CEO compensation. From a human resources management perspective. firm size (total assets). are significant determinants. gross revenue. 2009). CEOs are better rewarded in terms of revenue generation efficiency. bonuses. Chi and Gursoy (2009) suggested that greater employee satisfaction could indirectly improve financial performance. Researchers have recently started examining the potential determinants of firm performance using non-financial factors (Mao and Gu. 2007) and franchising (Koh et al.. Ketchen et al. value of options. Youn and Gu (2007) showed that Korean lodging firms’ operating costs are too high and operating profit margins too low. There are other various nonfinancial factors. They measured CEO PRP sensitivity . that could be linked directly or indirectly to performance and could be examined alongside financial issues. 2008b. net income. Hua and Upneja. restricted stock values. Nevertheless. For unlisted companies. 2009b).IJCHM 23. (2006) examined the relationship between CEO compensation (including salary. and other sources) and financial performance for the restaurant industry. While the first of these correlations is consistent with the PRP principle. an insignificant relationship between stock performance and CEO compensation was observed. Gu and Choi (2004) showed that chief executive officer (CEO) cash compensation in casino firms is positively correlated with profitability (measured by ROA).. 2009a. but not casinos (Lee and Park. such as current and quick ratios. Firm size serves as a control variable rather than a performance indicator. and stock price. 2009. indicating that CSR has a U-shaped effect on long-term accounting performance. however. Madanoglu and Karadag (2008) assessed the relationship between changes in CEO compensation from period to period rather than from firm to firm. 2008).. ROE is still the best and most reliable tool to determine financial performance (Madan. Kim and Gu (2005) showed that of 12 potential variables. 2006). for example.

In their study. all of which are performance-related. Clearly. and performance. restaurants. probably because there exist better databases such as COMPUSTAT and more publicly traded hospitality firms that are specifically listed as hotels. CEOs’ base salary is relatively small (30 percent on average for 2004) compared to the rewards generated from changes in equity-based compensation. Concluding remarks Hospitality financial management research has grown noticeably since Harris and Brown’s (1998) and Atkinson and Jones’s (2006) reviews. making it easier to collect data on publicly-traded firms. and casinos. Most studies sample from the US market. Less work has been done outside of the USA For example. equity financing is a relatively less-studied topic that might have potential for research exploration. With more financial management research being conducted worldwide. and refinancing from equity owners could be a better option than commercial banks. and long-term incentive plan payments. While some studies appear to replicate mainstream finance research using hospitality samples.and showed a positive relationship between stock returns and changes in CEO cash compensation. within-sector differences in financing or investing behaviors between hotels. The interrelationships between various compensation components and their individual or joint impact on firm performance could be an interesting topic to explore. recent research has emphasized hospitality financing due to the capital-intensive nature of the industry. dividend policy.g. a few financial data providers in Asia (e. (2009) showed that poor stock performance and low company accounting returns significantly increase the likelihood of forced CEO turnover in the restaurant industry. bonuses. so available financial information is not sufficiently detailed. 2009) might need to be revisited. financial condition. 6.g. Upneja and Dalbor. Our review should give academics and practitioners an overview of the updated body of knowledge in the field and stimulate further in-depth research that will extend the literature and prompt better financial decision-making for practitioners. A well-structured compensation package appears to be important in rewarding CEOs based on those results over which they have some control. Financing precedes hospitality development and is closely linked to evaluating investment opportunities. How might one-off events (predicted or otherwise) that change the “rules of the game” shape the operation and management of hospitality firms? Case studies of firms that failed because of and survived after such events would help illuminate the stories behind the scenes. Facing an ever-changing financial world. and casinos is also in evidence (e. traditional wisdom such as “pecking order” or trade-off theories (as noted in Karadeniz et al. CSMAR and Taiwan Economic Journal) have recently established databases similar to COMPUSTAT. many hotel firms are not publicly listed and they are operated as a subsidiary of a multi-industry corporation such as Hutchison-Whampoa. (2006). Industry uniqueness is also observed. Nevertheless. investing. except for Barber et al. in Hong Kong. the body of knowledge may become more comprehensive by including more geographic regions. Compared to debt financing. Barber et al. The current paper has reviewed and synthesized studies published over the period 1998-2009 in the categories of financing. 2001b).. restaurants. Most studies have focused on CEO cash compensation. Financial research at the industry level has Hospitality financial management 963 . rather than as a separate entity.

it is also observed that authors of some studies do not make a strong case for why a separate investigation on the hospitality industry is warranted. Studies of this type contribute minimally. Industry-specific regulations and restrictions in shareholdings (such as the case of the casino industry on block ownership.. to the body of knowledge. “A survey of capital budgeting methods used by the restaurant industry”. S.A. For example. NJ. Financial features as determinants of hospitality firm events (e. (2000). It is expected that hospitality finance researchers could contribute more by developing new theories in the future. S.W. geographic diversification and owner-lender relation) and financial ones as drivers of firm events or performance. Nevertheless. J. 2007). 1958).IJCHM 23. References Andrew. 47-55. Jang and Ryu (2006) and Jang and Kim (2009) showed contradictory evidence against the separation theorem between a firm’s investing and financing decisions (Modigliani and Miller. Our review of past studies highlighted the development of new theories. Some hospitality finance researchers have explored hospitality firms’ nonfinancial features (e. Damitio. given that mainstream finance researchers have already examined the same problems and issues. which subsequently play a part in driving firm performance. The emergence of hotel REITs introduced in places such as Hong Kong (e. and LeBruto. or managers might have different views about how and what financial decisions should be made (Andrew et al. R.g. The models constructed in the reviewed studies could serve as benchmarks for industry practitioners in gauging their past firm performance and condition because most studies were conducted on a macro level using samples at the industry level. if any. tax issues. owners.g. failure) or behavior (e. Financial Management for the Hospitality Industry. and Schmidgall. Upper Saddle River.7 964 merit because stakeholders such as creditors. financial leverage. one related work is Beals’s (2006) introduction of hotel real estate finance and investments on topics related to operating leverage. Journal of Hospitality Financial Management.P. Tsai and Gu.M.g.. (2007). and others. whether these theories are industry-specific or not. CDL Hospitality Trusts) in the past few years may warrant case studies. Regal REIT) and Singapore (e. R. While asset management has become a field of expertise and profession within the financial management arena in the USA (Andrew et al. owner-franchisor and owner-operator relations. 1958. pp. 2007b) can affect such areas as debt financing and corporate governance.. W. Little evidence of new theory development in hospitality financial management research was noted in Atkinson and Jones’s (2006) work.g. financing) have been well examined in the reviewed studies.. . One noticeable area receiving little attention over the past 12 years is the domain of asset management. Empirical investigation of hospitality real estate finance and the development of REITs in Asia could be good topics to explore. Ashley.g. Madanoglu and Olsen’s (2005) proposed LAPM contributed better understanding and estimation of the cost of equity for the lodging industry. 2007). However.S. not many studies identified in our review examined asset management-related issues or the underdevelopment of asset management in other continents such as Asia. Atkinson. Vol. 1.M. Tobin. Pearson Education. 8 No.

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