Journal of Hospitality and Tourism Management 43 (2020) 32–41

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Journal of Hospitality and Tourism Management

journal homepage: www.elsevier.com/locate/jhtm

Effects of epidemic disease outbreaks on financial performance of T

restaurants: Event study method approach
Jaewook Kima,∗, Jewoo Kimb, Seul Ki Leec, Liang (Rebecca) Tangb
a
Conrad N. Hilton College of Hotel & Restaurant Management, University of Houston, 4450 University Drive, Houston, TX, 77204, USA
b
Department of Apparel, Events, and Hospitality Management, College of Human Sciences, Iowa State University, 2302 Osborn Drive, Ames, IA, 50011, USA
c
College of Hospitality and Tourism Management, Sejong University, 98 Gunja-Dong, Gwangjin-Gu, Seoul, 143-747, Republic of Korea

A R T I C LE I N FO A B S T R A C T

Keywords: The present study aims to investigate the influence of macroscopic and infectious epidemic disease outbreaks on
Epidemic diseases financial performance of the restaurant industry. Nine events on four epidemic disease outbreaks during
Restaurants firm characteristics 2004–2016 were analyzed. Event study method and Mann-Whitney U test were used to estimate the effect of
Risk mitigating factors three firm characteristics (brand reliability, advertising effects, and service types) on firms’ value. This study
Event study method
confirmed the negative influence of epidemic disease outbreaks on the restaurant industry, and identified all the
three firm characteristics serve as risk mitigating factors. This research contributes to the research body on the
effects of epidemic disease outbreaks on the restaurant industry and assists practitioners in designing effective
strategies to stabilize financial performance during unpredictable events.

1. Introduction and minimize risks associated with macroscopic food-related epidemic

The restaurant industry has been widely acknowledged as a driving
force of the U.S. economy (National Restaurant Association (NRA),
2017). It plays contributing roles as employer, a trustworthy partner in
environment preservation, and a dynamic supporter of consumers’ well-
being (Ma & Ghiselli, 2016; NRA, 2016). There are more than one
million restaurant establishments in the U.S. (NRA, 2017). Employment
of the restaurant industry had grown from 11.9 million in 2004 to 14.7
million in 2017, which comprises of 10% of the overall U.S. workforce.
The sales of restaurant industry had also increased in the past decade
from 440.1 billion USD in 2004 to 799 billion USD in 2017 (NRA,
2017).
Despite the formidable growth in employment and sales, the in-
dustry has suffered several fluctuations in varying times due to issues
and events arising from the external environment, such as terrorism,
natural disasters, economic recession, and disease outbreaks (Hsu &
Jang, 2007; Kumcu & Kaufman, 2011). Especially unlike foodborne
disease that are generally caused by food ingredient mishandling of
humans in the process, infectious epidemic disease outbreaks that are
uncontrollable by the industry have resulted in crucial financial vola-
tility in response to consumers’ declining needs of consuming foods
related to a specific disease, fear of infection, and avoidance of eating
out (Koh, Rhou, Lee, & Singal, 2015; Yeung & Morris, 2006). So, it is
more than essential for restaurant industry to strategize how to mitigate
diseases on financial performance and sustainability.
Accordingly, the impact of food-related epidemic disease outbreaks
on restaurant industry has attracted scholarly attention (e.g., Fox &
Peterson, 2002; Loharikar et al., 2012). Even though food-related epi-
demic diseases, which can be characterized as to be spread widely and
affecting a large number of people, are perceived to be unexpected but
devastating factors in restaurant industry, studies have rather spor-
adically explored the influence of epidemic disease outbreaks on fi-
nancial performance and economic status of the restaurant industry on
a macro scale (e.g. Chen, Jang, & Kim, 2007; Seo, Jang, Miao, Almanza,
& Behnke, 2013; Zhan & Chen, 2013). Such a macroscopic analysis
serves the “the Global Positioning System (GPS)” for the government to
promptly surveil disease outbreaks and for individual restaurant firms
to develop preventive tactics to avoid financial loss (Keogh-Brown,
Smith, Edmunds, & Beutels, 2010). By understanding disease char-
acteristics, predicting magnitude of economic impacts, and simulating
potential preventive strategies based on individual firms’ available re-
sources, the financial impacts of unexpected epidemic disease out-
breaks on the restaurant industry could be minimized (Alonso-Almeida,
Bremser, & Llach, 2015; Conner, 1991). In this line of reasoning, Zhan
and Chen (2013) further suggested that such analysis could assist in-
dividual restaurant businesses to strengthen financial resilience and
sustainability during and after the crisis. Therefore, identifying and
analyzing different epidemic disease outbreaks during 2004–2016,

∗
Corresponding author.
E-mail addresses: jkim65@uh.edu (J. Kim), jjawoo@iastate.edu (J. Kim), seulkilee@sejong.ac.kr (S.K. Lee), rebeccat@iastate.edu (L.R. Tang).

https://doi.org/10.1016/j.jhtm.2020.01.015
Received 10 August 2019; Received in revised form 14 December 2019; Accepted 24 January 2020
1447-6770/ © 2020 CAUTHE - COUNCIL FOR AUSTRALASIAN TOURISM AND HOSPITALITY EDUCATION. Published by Elsevier Ltd All rights reserved.
J. Kim, et al.
which had negative effects on restaurant industry, could shed lights for
the practitioners to better counteract to the future epidemics.
Dean, Mengüç, and Myers (2000) suggested that firm characteristics
(e.g., brand reliability, service types) could be utilized as forms of
strategies that help businesses secure competitive advantages in the
marketplace. Based on the resource-based view, firms can be depicted
as a bundle of unique and inimitable resources and capabilities
(Conner, 1991; Rumelt, 1991). In such view, resources can be defined
as “stocks of available factors that are owned or controlled by the firm”
(Amit & Schoemaker, 1993, p. 35). The valuable resources are reflected
as firm characteristics and provide a foundation for competitiveness
and sustainability of a business in the marketplace (Newbert, 2008).
Different forms of firm characteristics show distinct strengths for de-
veloping strategies related to branding and operational systems. How-
ever, to the authors’ best knowledge, limited research efforts have been
undertaken in exploring how the firm characteristics impact an orga-
nization internally and externally during and after disease outbreaks
(e.g., Alonso-Almeida et al., 2015). Therefore, the present study aims to
fill the research gap.
Accordingly, the purpose of this study is to explore firm character-
istics for risk reduction during different food-related epidemic disease
outbreaks in the restaurant industry. Specifically, this research aims (1)
to collectively measure the impacts of overall disease outbreaks on
restaurant industry during 2004–2016; (2) to analyze the impacts of
each epidemic disease outbreak and its corresponding events on res-
taurant industry during 2004–2016; and (3) to investigate the roles of
firm characteristics in risk reduction during epidemic disease out-
breaks. This study utilizes the event study method (ESM) to estimate the
effect of disease outbreaks in the stock market by capturing abnormal
changes of firms’ value during the specific time periods. By doing so,
the study is expected to contribute to the body of knowledge regarding
the impacts of epidemic disease outbreaks on the restaurant industry
and provide suggestions for practitioners to strategically manage their
firm characteristics in stabilizing the firm value during unpredictable
events.
2. Literature review
2.1. Epidemic disease outbreaks that affect restaurant industry
2.1.1. Avian flu
Avian influenza is a disease caused by infection with avian (bird)
influenza (flu) Type A viruses. Avian flu viruses do not normally infect
humans (Center for Disease Control and Prevention (CDC), 2014).
However, avian flu significantly damages the poultry consumption
because consumers are fear of being affected (Obayelu, 2007). For ex-
ample, poultry consumption declined by up to 70% in Mediterranean
European countries in 2006 (Taha, 2007). In 2004 Avian Influenza
caused poultry consumption to drop by 26%, 16%, and 15% in Singa-
pore, Thailand, and China, respectively (Taha, 2007). At micro-scale,
Obayelu (2007) indicated that about 80% of consumers stopped or
intended to stop consuming poultry products in their households during
the outbreak of avian flu. Similarly, the avian flu negatively influenced
the purchase behavior of consumers in restaurant firms (CDC, 2014; De
Krom & Mol, 2010; Taha, 2007).
2.1.2. Swine flu
Swine flu is a respiratory disease of pigs caused by type A influenza
viruses. Swine flu (H1N1) has been acknowledged as one of the most
virulent flu strains since its emergence in 2009 in which 203,000 people
died worldwide and specifically10,000 people lost their lives in the U.S.
((World Health Organization WHO, 2018)). Although the U.S. Depart-
ment of Agriculture (USDA) announced that the Swine flu is not a food-
borne disease, its outbreak depressed the pork imports of U.S. and many
other countries in 2009. Swine flu led to 11 percent decrease in global
pork trade in that year (Johnson, 2009). Due to the uncertainty and
33
Journal of Hospitality and Tourism Management 43 (2020) 32–41
anxiety about food safety, consumers’ consumption of food made from
pigs decreased considerably in the restaurant firms (Bánáti, 2011).
2.1.3. Bovine spongiform encephalopathy (BSE)
Bovine spongiform encephalopathy (BSE) is a neurological disease
of cattle caused by food borne exposure to a prion (CDC, 2015). Due to
potential risks of infecting humans, the outbreak of BSE significantly
influenced the consumption of cow-related food (Fox & Peterson, 2002;
Jin, Skripnitchenko, & Koo, 2004; Pennings, Wansink, & Meulenberg,
2002). For example, during the BSE outbreak in 2002, retail sales in
Japan plunged by 40–50 percent and restaurants specializing beef re-
ported more than 50 percent loss in sales revenue (Fox & Peterson,
2002; Pennings et al., 2002). The BSE outbreak in 2003 led to the de-
cline of domestic consumption by 10% as well as to the decrease of
domestic market share of beef by 4.5% in the U.S. (Jin et al., 2004; Jin
& Kim, 2008).
2.1.4. Salmonella Infantis
Salmonella is one of the most common causes of food poisoning in
the U.S. (WHO, 2018). CDC (2014) reported that the number of affected
persons by Salmonella Infantis increased from 195 at 27 states during
2011 outbreak to 363 at 43 states and Puerto Rico during 2014 out-
break. Food and animals are two sources of Salmonella infections: Food
contamination and animal contation (WHO, 2018). Salmonella bacteria
can be passed to human beings when individuals contact with infected
animals, such as poultry and pets, including cats, dogs, birds, and
reptiles (Loharikar et al., 2012). Different from food contamination, the
animal contagions are epidemic (Seo et al., 2013; WHO, 2018). In the
U.S., approximately 50 million live poultry are sold, and most of mul-
tistate outbreaks of human Salmonella infections are associated with
direct and indirect exposure to live poultry purchased from hatcheries
and agricultural feed stores (Loharikar et al., 2012). Since most res-
taurants and food processing companies primarily use poultries pur-
chased from hatcheries, the disease has spread so far and wide that
consumers remain unsure whether it is safe to consume poultries from
restaurants (Loharikar et al., 2012; Seo et al., 2013).
2.2. Restaurant firms’ characteristics as risk reduction factors
To be competitive and sustainable in the marketplace, firms strive to
create a unique set of assets/resources that can differentiate themselves
from others (Gázquez-Abad, Huertas-García, Vázquez-Gómez, & Casas
Romeo, 2015). The resource-based view (RBV) depicts a firm as a
heterogeneous bundle of resources and capabilities (Conner, 1991;
Rumelt, 1991). Resources could be integrated to create unique char-
acteristics of a firm, which serve as the key factors for the firm to de-
fense against unexpected market circumstances (Conner, 1991; Rumelt,
1987).
Based on a review of over one hundred papers which analyzed a
number of firm characteristics, Mitchell and McGoldrick (1996) ad-
dressed information search (i.e., advertising) and reputed brands (i.e.,
brand reliability) as the primary risk reduction strategies used by
consumers. In the same vein, Rubio, Oubiña, and Villaseñor (2014)
confirmed the importance of brand-quality inference on the perception
of risks in the food service context. He indicated “quality conscious
consumers are more brand conscious and place more trust in the per-
formance of recognized and advertised brands” (Rubio et al., 2014, p.
290). Thus, brand reliability and advertising effect are the two pre-
dominant factors to lower risks and eliminate uncertainties in con-
sumers' decision making process. Although Mitchell and McGoldrick
(1996) highlighted the importance of these brand-relevant factors
aforementioned, they suggested that the adoption and hierarchy of risk
reduction strategies vary by operational characteristics (e.g., types of
firm establishments). Service type is a particularly important opera-
tional feature in restaurant firms since it implies price and product/
service quality (Kolb, 2011; Rhou & Koh, 2014; Schiffman & Kanuk,
J. Kim, et al. Journal of Hospitality and Tourism Management 43 (2020) 32–41

2004). Based on the discussions above regarding consumers' perceived outbreak is one of a restaurant firm's systematic risks, a hypothesis was
risks and their risk reducing strategies, the present study examined created as follows:
three restaurant firms’ characteristics as risk mitigating factors during
H2. Advertising of restaurant firms mitigates the negative effect of
epidemic disease outbreaks, including brand reliability, advertising
epidemic disease outbreaks.
effects, and service types.

2.2.1. Brand reliability 2.2.3. Service types

Reliability was defined as “unusual capacity to produce collective Publicly traded U.S. restaurants are categorized into two segments
outcomes of a certain minimum quality repeatedly” (Hannan & based on their service types: limited-service and full-service (Kolb,
Freeman, 1984, p. 153). Brand reliability plays a vital role in ensuring 2011). Limited-service restaurant firms could develop operation stan-
product/service quality and minimizing purchase risks in consumers’ dard and format that are easily transferred to new businesses and/or
decision making process (Vogus & Welbourne, 2003). Consumers are other units by replicating intangible assets, such as service delivery
more likely to consider a well-known and reputable brand as reliable, process, food and service quality, ambience, and operational know-how
since they anticipate less risk related to their purchase than the alter- (Grant, 1996). Contrarily, full-service restaurant firms are characterized
natives (Jiuan Tan, 1999; Mitchell & Greatorex, 1989). This reliability by complicated and customized services, which satisfy consumers’ ex-
ultimately manifests a brand as its capability to stay ahead of other pectations for high price paid. In other words, full-service restaurants
competitors in the marketplace even during unpredicted events (Brown charge relatively higher prices due to variability and complexity of the
& Eisenhardt, 1997; Vogus & Welbourne, 2003). business format and heterogeneity of products and services (Hoover,
Many researchers used Corporate Social Responsibility (CSR) as a Ketchen, & Combs, 2003; Hua & Dalbor, 2013). These irreplicable
proxy for measuring brand reliability in consumers' minds (e.g., Koh, characteristics enable full-service restaurants to secure lower price
Lee, & Boo, 2009; Kramer, 2006). CSR was defined as a company's elasticity, less vulnerability on market fluctuation, and higher profit
commitment to eliminating any harmful effects and maximizing its margin compared to limited-service restaurants (Andreyeva, Long, &
long-run beneficial impact on society (Mohr, Webb, & Harris, 2001). Brownell, 2010; Kim, Ryan, & Ceschini, 2007). Therefore, in un-
CSR depicts how a company shows socially responsible behaviors, such expected market conditions (e.g., diseases outbreaks) full-service res-
as business ethics, employee relationship, and environmental concerns taurant firms are more likely to maintain financial reliability, compe-
(Mohr & Webb, 2005). CSR contributes to develop and maintain firm titiveness in the marketplace, and sustainability against the external
reputation, and accordingly enhances consumers' perceived brand re- effects compared with limited-service restaurants.
liability (McWilliams & Siegel, 2001; Pava & Krausz, 1996). As a result,
CSR is expected to generate a significantly positive impact on a firm's H3. Full-service restaurants are more capable of mitigating the negative
financial performance (Pava & Krausz, 1996). effect of epidemic disease outbreaks than limited-service restaurants.
McGuire, Sundgren, and Schneeweis (1988) analyzed the relation-
ships between a firm's CSR and its financial performance. They
3. Methodology
(McGuire et al., 1988) found that a firm's prior stock-market return is
more closely related to CSR than the subsequent accounting perfor-
3.1. Data
mance factors (e.g. sales growth and asset growth) and market perfor-
mance factors (e.g. total return) are. This finding indicates that a firm
For this research, only food-related epidemic diseases were sampled
with high CSR are less sensitive to unpredicted external events com-
to conduct a series of analyses. In this sample disease, man-made
pared to that with low CSR. Similarly, Lins, Servaes, and Tamayo
foodborne illness and diseases were completely excluded. A total of
(2017) demonstrated that a firm with a high level of CSR during
nine events on four food-related epidemic disease outbreaks were
2008–2009 financial crisis had stock returns that were four to seven
identified between 2004 and 2016 using the databases of the World
percentage higher than those with a low level of CSR. They (Lins et al.,
Health Organization (WHO), the U.S. Department of Agriculture
2017) thus argued that CSR plays a critical role of building brand re-
(USDA), and the Center for Disease Control and Prevention (CDC)
liability during unpredictable events. Brand reliability demonstrated by
(Table 1). An event was defined as public recognition of an incident of
CSR is expected to improve firms' value and mitigate financial risks
food-related epidemic disease outbreak. Accordingly, the event day
during unexpected marketing circumstances (Koh et al., 2009; Lins
refers to the first day when the event of each disease outbreak is re-
et al., 2017; McWilliams & Siegel, 2001; Mohr & Webb, 2005).
leased via media. The date of the event day for each occurrence was
H1. A restaurant's brand reliability mitigates the negative effect of obtained from the LexisNexis Academic database and the Access World
epidemic disease outbreaks. News. Table 1 indicates epidemic disease outbreaks used for the ana-
lysis in this study.
2.2.2. Advertising effects
Table 1
Advertising effects are associated with memory, attitude, and be-
Profile of epidemic disease outbreaks and corresponding events.
havior of individuals toward the advertising entity (Weber &
Schweiger, 2017). This phenomena could be explained by the exposure Year Event day Type of disease Variable Infected region in the U.S.
name (by state)
theory in psychology (e.g. Fuchs & Reichel, 2011; Zajonc, 1968). In the
exposure theory, Zajonc (1968) demonstrated that exposure to a sti- 2003 12/23 BSE BSE 03 Washington
mulus can enhance the familiarity and desirability of individuals to that 2004 2/17 avian influenza Avian 04 Texas
stimulus. Moreover, Fuchs and Reichel (2011) suggested that exposure 2004 5/24 BSE BSE 04 Texas
2006 3/15 BSE BSE 06 Alabama
to advertising increases consumers' recognition of the brand and ten-
2009 3/28 swine flu Swine 09 All states
dency to purchase the promoted product, because the informative 2012 2/25 Salmonella Sal 12 27 states
content of advertising resolves some of the uncertainty that “risk Infantis
averse” consumers face and thus reduces the risk associated with the 2012 4/24 BSE BSE 12 California
product purchase. Furthermore, a firm's systematic risk (e.g., economic 2013 3/2 Salmonella Sal 13 30 states
Infantis
recession, market volatility, interest rates, and other external factors)
2014 2/7 Salmonella Sal 14 43 states
could be lowered when a firm's advertising effects mitigate market Infantis
changes (McAlister, Srinivasan, & Kim, 2007). Considering that disease

34
J. Kim, et al.
To estimate abnormal return (AR) and cumulative abnormal return
(CAR), stock returns of restaurant firms and market returns for the es-
timation period and the event window were collected from the Center
for Research in Security Prices (CRSP). The S&P 500 market index was
used as market returns. Fama-French three research factors were ob-
tained from the Data Library of Kenneth R. French. Using StrataSearch,
the LexisNexis Academic database, and the EDGAR database of the
Securities and Exchange Commission, this study removed the stock
returns of restaurant firms which had other influential events (e.g.,
earnings announcement, mergers and acquisitions, and replacement of
executive-level managers) within the event window. As it is essential to
analyze abnormal return, publicly traded restaurant firms in the U.S.
were sampled to precisely measure AR and CAR that fulfilled the re-
search purposes. The final sample consisted of 91 restaurant firms that
were publicly traded in U.S. stock market during 2003–2016, which
reflects AR and CAR of one prior year and one subsequent year of the
events analyzed.
First, the Corporate Social Responsibility (CSR) index provided by
the database of Kinder, Lydenberg, Domini & Co. (KLD) was used to
assess brand reliability. Advertising expenditure was used to measure
advertising effects of restaurant firms, which is consistent with previous
research (e.g., Denekamp, 1995). Since brand reliability and advertising
effects are likely to accumulate over time (Chaudhuri, 2002), the pre-
sent study used accumulated CSR scores and advertising expenditure
for three years prior to each disease outbreak and individual event. All
91 sample restaurant firms were categorized into two groups according
to the North American Industry Classification System: full-service res-
taurants and limited-service restaurants. All financial data and service
types of the restaurant firms were collected from the Compustat data-
base.
3.2. Event study method
The present study employed the Event Study Method (ESM) to in-
vestigate the effect of four epidemic diseases outbreaks (avian flu,
swine flu, BSE, and Salmonella Infantis) on restaurant firms' value. ESM
has been widely used to estimate the effect of a particular event on
corporate performance in accounting, finance, and strategy literature
(e.g., Chang & Zeng, 2011; Lee & Connolly, 2010). ESM uses stock
prices rather than accounting measures (e.g., revenue and profit) to
measure firms' value, because accounting measures can be manipulated
by changes in accounting rules and often fail to distinct an event's
impact from business trends (McWilliams & Siegel, 1997; Nicolau,
2002). ESM assumes that investors evaluate the effect of an event on a
firm based on the changes of trading activities in the stock market
(Nicolau, 2002). Accordingly, stock price of a business reacts timely to a
new event which reflects its overall impact on the firm value
(MacKinlay, 1997). Under this assumption of market efficiency above,
ESM is able to capture abnormal changes in the market value of a firm
created by an event beyond average market returns (Hsu & Jang, 2007;
Lee & Connolly, 2010).
For the ESM analysis in the present study, the market model and the
Fama-French three-factor model (FF model hereafter) were employed to
estimate AR and CAR of restaurant firms affected by the four epidemic
diseases outbreaks. The FF model is the extended market model with
economic equilibrium, which includes two additional risk factors (Ting,
2017). AR is the difference between the actual return and the expected
return that is explained by an event rather than overall stock market
movements. CAR is the sum of ARs over the event window. In the
present study, the event window was the period from five trading days
before the event day to 10 trading days after the event day. The market
model is as follows:
Rit = αit + βRmt + εit (1)
Rit = αit + Rft + β(Rmt - Rft) + γSMBt + δHMLt + εit (2)
35
Journal of Hospitality and Tourism Management 43 (2020) 32–41
Where Rit = return on stock of restaurant firm i at time t, Rmt = return
of stock market at time t, Rft = risk free return at time t,
SMBt = difference between stock returns of small and large firms at
time t, HMLt = difference between stock returns of firms with high and
low book-to-market ratios at time t, and εit = error term for restaurant
firm i at time t. It is customary to define that the event window should
be longer than the specific period of interest (MacKinlay, 1997). In the
present study, since no warning signs existed before any outbreak, it is
reasonable to start from the event day (t-0). However, to highlight the
fact that there were no significant changes on AR and CAR of firms
before disease outbreaks, the estimation period was defined to be be-
tween 210 trading days and 10 trading days before the event day. For
the purpose of this analysis, 3 days prior to the event day (t-0) and 10
days after the event day were reported in the section of results. The
market model and FF model were then used to calculate expected stock
returns (e (Rit)) during the event window. The expected returns was
compared with the actual returns during the event window and the
difference between these returns was determined as AR. The re-
presentation of AR and CAR are formulated below:
ARit = Rit - e(Rit) (3)
j
CARij = ∑ ARit
t=0 (4)
T-tests were applied to ARs and CARs in order to examine the effect
of epidemic disease outbreaks on restaurant firms' value (Brown &
Warner, 1985). The null hypothesis for the t-test is that AR (or CAR) is
not significantly different from zero. The results of positive (or nega-
tive) significance above indicate that the epidemic disease outbreaks
positively (or negatively) affect the restaurant firm's value.
3.3. Tests for the effect of firm characteristics
To investigate the effect of firm characteristics on AR and CAR, this
study split the sample under consideration into two groups by the mean
value of CSR score for brand reliability, advertising expenditure for
advertising effects, and restaurant classification (full service – limited
service) for service types (Seo et al., 2013). The AR and CAR of these
two groups were compared by employing t-test for two independent
groups and Mann-Whitney U test (M-H test). The M-H test, as a non-
parametric counterpart of t-test, is not based on the assumptions of
normal distribution and equal variance (McKnight & Najab, 2010).
Thus, it is suitable for the comparison of two groups with different
sample sizes w/o normal distribution in the present study.
4. Results
4.1. Effect of epidemic disease outbreaks on financial performance
The ESM estimation was used to investigate the effect of the epi-
demic disease outbreaks on restaurant firms’ financial performance.
The estimation results from the market model and FF model provide
evidence of their negative relationship consistently. Given that the FF
model is likely to fit stock returns better than the market model using
only a conventional factor (Bundoo, 2008; Connor & Sehgal, 2001), the
present study presents the ESM estimation results based on the FF
model. The results from the market model is provided in Appendix A.
The results of AR are shown in Table 2 and Fig. 1. The general
impact of the four epidemic disease outbreaks with nine events (Dis-
eases total) was significantly negative over the event window. Among
four BSE events, the ones in 2003, 2004 and 2012 showed significantly
negative impacts on restaurant firms’ value.
One distinctive pattern was observed in the AR results. Swine flu in
2009 (Swine 09), and all Salmonella Infantis incidents (Sal total, Sal 12,
and Sal 14) significantly negatively affected firm value in the early to
mid-days of the event window and then turned to be positive in the
J. Kim, et al. Journal of Hospitality and Tourism Management 43 (2020) 32–41

Table 2
Abnormal return (AR) results.
Disease total Avian 04 BSE total BSE BSE 04 BSE BSE 12 Swine 09 Sal total Sal 12 Sal 13 Sal 14
03 06

t-3 0.01 0.05 0.05 0.00 −0.46 0.33 0.35 0.28 −0.17 −0.10 −0.10 −0.30
t-2 0.06 0.98 0.00 0.41 −0.58 −0.05 0.30 −0.30 −0.18 0.37 −0.51 −0.41
t-1 0.33 1.04 0.32 0.61 0.31 0.00 0.20 −0.25 0.28 0.08 0.17 0.59
t0 −0.35* −0.29 −0.49* −1.74** −0.71 0.33 0.12 0.61 −0.51** −0.74** 0.14 −0.93**
t1 −0.08 0.24 −0.11 0.02 −0.41 0.31 −0.48 −0.60 −0.02 −0.16 0.24 −0.13
t2 0.09 1.16 −0.13 0.62 −0.06 −0.18 −1.09** −0.38 0.09 0.23 0.24 −0.19
t3 −0.28 −0.70 −0.04 0.36 −0.78** 0.05 0.24 −1.90* 0.17 0.19 0.13 0.18
t4 0.07 −0.61 0.59* 0.44 0.73 0.07 1.36 −1.25 0.06 0.33 −0.30 0.16
t5 −0.47** −0.10 −0.13 0.02 −0.26 −0.23 −0.00 −2.01* −0.64** −0.74* −0.26 −0.91*
t6 0.19 0.52 0.00 0.18 −0.03 −0.20 0.12 1.80* −0.28* −0.76** −0.26 0.16
t7 0.11 1.69 0.09 0.35 0.50 −0.27 −0.23 −1.41 −0.07 −0.05 0.37 −0.62**
t8 −0.46** −0.06 −0.43* −0.85* −0.70 0.04 −0.28 −1.57* −0.29* −0.19 −0.32 −0.36
t9 −0.30 0.02 −0.88* −1.04* −0.64* −0.25 −1.90 −1.39 −0.14 0.12 −0.44 −0.10
t10 −0.32* −0.34 0.18 0.17 0.23 0.13 0.22 −3.03** −0.12 0.29 −0.21 −0.42

later days. In addition, the effect of BSE in 2003 (BSE 03) on firms’
value was significantly negative at the event day. The negative effect
turned positive two days after the event day and then was back to ne-
gative again eight days after the event day. Avian flu in 2004 (Avian
04), and BSE in 2006 (BSE 06) had no significantly negative effects on
firm value.
Table 3 and Fig. 2 show significantly negative impacts of disease
outbreaks on CAR. In particular, Disease total, BSE in 2004 (BSE 04),
Swine flu in 2009 (Swine 09), and Salmonella Infantis in 2014 (Sal 14)
were found to be significantly negative throughout the entire 60 days of
the event window.
4.2. Firm characteristics as risk reduction factors
Based on the Mann–Whitney U test which examined the impact of
brand reliability (high versus low CSR scores) on AR and CAR, as shown
in Table 4, restaurant firms with a high brand reliability showed sig-
nificantly less negative AR and CAR during disease outbreaks than
those with low reliability (H1 was supported). It can be interpreted that
as consumers rely heavily on the perception of brand reliability when
evaluating quality, safety, and security of products/services, the relia-
bility factor directly contributes to the firm value in the disease out-
breaks. Second, restaurant firms with high advertising expenditure also
experienced significantly less negative AR during disease outbreaks
than those with low advertising cost (H2 was supported). However,

Fig. 1. Abnormal return (AR) for the epidemic disease outbreaks.

36
J. Kim, et al. Journal of Hospitality and Tourism Management 43 (2020) 32–41

Table 3
Cumulative abnormal return (CAR) results.
Disease total Avian 04 BSE total BSE 03 BSE 04 BSE 06 BSE 12 Swine 09 Sal total Sal 12 Sal 13 Sal 14

t0 −0.35* −0.29 −0.49* −1.74** −0.71 0.33 0.12 0.61 −0.51** −0.74** 0.14 −0.93**
t0~t1 −0.43* −0.05 −0.60* −1.72** −1.12 0.64 −0.37 0.01 −0.53* −0.90** 0.38 −1.06**
t0~t2 −0.34 1.10 −0.72* −1.09* −1.18 0.46 −1.45* −0.37 −0.43 −0.67 0.62 −1.25**
t0~t3 −0.62* 0.40 −0.77* −0.73 −1.96* 0.51 −1.21 −2.27 −0.27 −0.48 0.75 −1.07*
t0~t4 −0.55 −0.21 −0.18 −0.29 −1.23 0.58 0.15 −3.52* −0.20 −0.14 0.45 −0.91
t0~t5 −1.02** −0.31 −0.31 −0.27 −1.49 0.35 0.15 −5.53** −0.85* −0.88 0.19 −1.83**
t0~t6 −0.84* 0.21 −0.30 −0.10 −1.51 0.15 0.27 −3.73* −1.13** −1.65* −0.07 −1.67*
t0~t7 −0.72 1.91 −0.22 0.26 −1.03 −0.12 0.03 −5.14** −1.20** −1.60* 0.30 −2.29**
t0~t8 −1.18* 1.85 −0.65 −0.59 −1.72 −0.07 −0.25 −6.71** −1.49** −1.79* −0.02 −2.65**
t0~t9 −1.48** 1.87 −1.54* −1.63 −2.36** −0.32 −2.16 −5.32** −1.64** −1.67 −0.46 −2.76**
t0~t10 −1.81** 1.53 −1.35* −1.46 −2.14* −0.19 −1.93 −8.36** −1.76** −1.38 −0.67 −3.17**

those two groups had no significant difference in CAR, since advertising
could immediately mitigate negative impacts of disease outbreaks by
delivering positive firm image and informational cues to persuade
consumers for purchase.
Last of all, based on the Mann–Whitney U test, CARs of full-service
restaurant firms were significantly lower than those of limited-service
restaurants in disease outbreaks (H3 was supported). It indicated that
limited-service restaurants showed greater negative impacts than full-
service restaurants did. This result implied that the variability and
heterogeneity of full-service restaurants make them defensible and
competitive even during disease outbreaks. To check the robustness of
these results on three firm characteristics, the present study conducted
two-way fixed-effects analysis using CAR as a dependent variable. The
results from the fixed-effects estimation (see Appendix B.) confirmed
the significance of the firm characteristics, which is consistent with our
original results.
5. Discussion
By testing four highly infectious epidemic disease outbreaks that are
directly related to food ingredients (poultry, beef, and pork) with nine
events, the present study confirmed the patterns and magnitude of the
impacts of disease outbreaks on restaurant firms' value. Furthermore,
all three firm characteristics investigated in the present study (brand
reliability, advertising effects, and service types) are effective in miti-
gating the negative impacts of epidemic disease outbreaks on firms’
value.
The present study theoretically enriches the knowledge body of
disease outbreaks’ impacts on restaurant industry from finance and
management perspectives. The employment of event study method
(ESM) provides a new angle to examine both immediate and long-term
impacts of individual events. And the present study confirms the ap-
plicability and reliability of the ESM to analyze and predict the effects
of disease outbreaks on restaurant firms. Furthermore, the compre-
hensive analysis including nine primary events during 2004–2016

Fig. 2. Cumulative abnormal return (CAR) for the epidemic disease outbreaks.

37
J. Kim, et al. Journal of Hospitality and Tourism Management 43 (2020) 32–41

Table 4
Effects of firm characteristics on firm value.
AR Brand Reliability Advertising Effects Service Types

Mean (High) Mean (Low) M-H t Mean (High) Mean (Low) M-H t Mean (Full) Mean (Limited) M-H t

t0 0.17 −0.01 1.09 0.24 0.12 −0.31 1.14 0.84 −0.14 0.63 −2.01* −1.99*
t1 0.40 0.20 −0.65 0.31 0.59 −0.04 1.61 1.35 −0.24 0.18 −0.81 −1.27
t2 −0.46 0.24 −1.44 −0.93 0.99 −0.23 1.23 2.27* 0.10 0.59 −2.24* −1.11
t3 1.40 −0.07 2.46* 2.08* 0.18 −0.22 0.67 0.70 −0.22 −0.32 0.86 0.27
t4 −0.37 −0.89 0.48 0.69 −0.07 0.01 −0.19 −0.16 −0.18 0.56 −1.12 1.94
t5 0.32 −0.89 1.11 1.42 0.06 −0.34 0.82 0.99 −0.61 0.01 0.62 −1.59
t6 0.71 −0.51 1.65 2.25* −0.47 0.28 −1.22 −1.47 0.40 −0.19 1.25 1.57
t7 −0.50 1.67 −0.66 −1.20 0.29 0.44 −2.97** −0.14 0.02 0.22 −0.80 −0.34
t8 −0.46 −0.72 −0.70 0.39 −0.43 −0.58 −0.64 0.27 −0.39 −0.33 −0.15 −0.15
t9 0.00 −0.47 1.12 0.50 −0.89 0.03 0.37 −2.05* −0.37 −0.25 0.03 −0.24
t10 −0.81 0.71 −2.15* −2.12* 0.07 −0.51 0.30 1.18 −0.34 0.04 −1.29 −1.12

CAR Mean (High) Mean (Low) M-H t Mean (High) Mean (Low) M-H t Mean (F) Mean (M) M-H t

t0 0.17 −0.01 1.09 0.24 0.12 −0.31 1.14 0.84 −0.14 0.63 −2.01* −1.99*
t0~t1 0.56 0.19 0.48 0.38 0.71 −0.35 1.99* 1.47 −0.38 0.81 −2.17* −2.31*
t0~t2 0.11 0.44 0.55 −0.28 1.69 −0.58 2.16* 2.75** −0.28 1.40 −2.61** −2.75**
t0~t3 1.51 0.37 0.87 0.82 1.88 −0.80 2.81** 2.44* −0.50 1.08 −2.35* −2.40*
t0~t4 1.14 −0.52 0.92 1.34 1.81 −0.79 2.30* 2.16* −0.68 1.63 −2.97** −3.30**
t0~t5 1.46 −1.41 1.76 2.03* 1.87 −1.14 2.66** 2.39** −1.29 1.65 −3.33** −3.77**
t0~t10 0.41 −0.73 1.02 0.52 0.44 −1.48 0.70 0.98 −0.25 −1.14 −2.98** −2.67**

provides convincing evidence and identifies the impact patterns of
epidemic disease outbreaks on the restaurant industry.
From the practical perspectives, the analysis of each disease out-
break and its corresponding events provides suggestions on improving
financial performance. For example, the result of AR and CAR showed
that Swine flu in 2009 (Swine 09) had both immediate and consistent
negative impacts on restaurant firms' value. When the H1N1 virus first
emerged in 2009, it was simply termed as “swine flu”. Later when it was
realized that the H1N1 virus affected not just pigs, the World
Organization for Animal Health changed the name of this novel strain
to ‘Influenza A (H1N1)'. However, many publicities still referred to the
H1N1 flu as “swine flu”. Fear and concern, miscommunication of the
intermediary, and insufficient and improper understanding regarding
the disease name strengthened consumers’ belief that it was hazardous
to eat pork meat.
From the result of AR and CAR, this study found that both BSE in
2003 (BSE 03) and BSE in 2004 (BSE 04) made immediately negative
impacts on restaurant firms' value, but BSE in 2006 did not. The po-
tential reason is that consumers had accumulated knowledge of the
disease after experiencing the two events in 2002 and 2004. Consumers
had realized the low affection risks of BSE due to frequent media ex-
posure. The contrary findings between two continuous events were also
observed in Salmonella Infantis events in 2012 (significantly negative)
and 2013 (insignificantly negative). However, the Salmonella Infantis
events in 2014 showed the significantly negative impact on restaurants’
firm value. While 153 sick people was reported in 2013 (Sal 13), 363 ill
people from 43 states and Puerto Rico were identified in 2014 (Sal 14).
Therefore, the rebound of negative impacts could be explained by the
severity of disease events.
Based on the discussions above, restaurants firms are advised to
develop strategies of communicating with government, professional
organizations, and consumers. The restaurant industry needs to work
closely with major health-related organizations, such as U.S.
Department of Agriculture (USDA) and Center for Disease Control and
Prevention (CDC), to get updated information regarding disease out-
break trends, preventions, and predictions. Therefore, as the inter-
mediary of risk communication between government and consumers,
the restaurant firms should convey authentic information regarding the
disease outbreaks to consumers and educate them to prevent infections
when dining out.
This study demonstrated which firm characteristics could be utilized
to strategically reduce the impacts of disease outbreaks on restaurant
firms. First, the results of the present study indicate that brand relia-
bility measured by CSR index has a positive impact on restaurant firms'
value, which is consistent with previous studies (Deephouse, 2000;
O'Neill & Xiao, 2006). The CSR index reflects a firm's endeavor to
pursue ethical responsibilities to both employees and consumers,
transparent management, green initiatives, equal opportunities in
hiring, and community service. Brand reliability is an intangible re-
source that generates competitive advantage in the marketplace during
disease outbreaks. Brand reliability established by CSR index could
assure consumers food safety in restaurant businesses, which can result
desirable strategic effects on firms' value in both short term (i.e., AR)
and long term (i.e., CAR) during disease outbreaks.
Second, advertising has a positive impact on restaurant firms' value
during the epidemic disease outbreaks. However, advertising effects are
relatively short-term, as shown in the results of the analysis. Based on
the Elaboration Likelihood Model (ELM) (Cacioppo & Petty, 1984),
most consumers pay less attention the message quality while being
influenced by peripheral factors (e.g., visual appeal) in advertising
clutter today (Kim & Benbasat, 2003). During disease outbreaks, ad-
vertising could resolve consumers’ concerns about the infections and
assure consumers to make patronages in the restaurants. However,
advertising fails to ensure long-term effects, rather it has been limited
to the immediate response. This finding is consistent with previous
literature (Fuchs & Reichel, 2011; Rhou & Koh, 2014). Therefore, res-
taurant firms could consider increasing advertising expenditure during
disease outbreaks based on the levels of revenues, financial status, ca-
pital structure and marketing mix to initiate immediate recovery and to
make direct informative communication with consumers to give them
intuitive cues regarding food safety.
Lastly, service types influence CAR during the disease outbreaks.
Generally CARs of full-service restaurants in disease outbreaks and in-
dividual events were significantly lower than limited-service restau-
rants right after diseases outbreaks. However, CAR of full-service res-
taurants got recovered fast. It indicates that systematic response and
risk strategies toward the unexpected and uncontrollable epidemic
disease outbreak of limited-service restaurants (e.g. fast-food chain
restaurant) could come from organizational learning process, which is
an important set of resources that firms accumulated and implemented
on their business platforms. This organizational learning process en-
ables firms to promptly capture current status and severity of the risk so

38
J. Kim, et al. Journal of Hospitality and Tourism Management 43 (2020) 32–41

that they can utilize alternate menu items and/or can restructure their
menus based on consumer risk perception. However, due to the price
sensitivity relatively low food quality, limited-service restaurants fails
to re-bump their sales by bring back their main food ingredients, which
were likely infected by the epidemic disease. That was a potential
reason why limited service restaurants failed to recover the negative
impacts of disease outbreak. On the other hand, consumers at full-ser-
vice restaurants are more concerned about their well-being and feared
of inflections. However, these consumers would be soon assured of the
safety of patronage in the restaurants after they get enough information
about the diseases. Therefore, the marketers in the full-service restau-
rants are advised to immediately communicate with consumers to
soothe their health concerns when the disease outbreaks occur. On the
other hand, consumers at the limited-service restaurants react slowly
but continuously to the disease outbreaks. Therefore, the marketers
should plan to make a constant communication with consumers in the
long term. In addition, since consumers at limited-service restaurants
are price sensitive, coupons and discounts could be an effective short-
term tactic to attract more customers during and immediate after the
disease outbreaks. The limited-service restaurant firms should take
advantage of the service opportunities during the special time periods
to persuade customers that food items are safe and re-deliver the po-
sitive brand image to them. To do so, consumer preferred risk reduction
strategies (Dean et al., 2000; Yeung, Yee, & Morris, 2010), such as ce-
lebrities’ endorsement, tasting events, repackaging, and limited time
premium special menu item development could be suggested.
6. Limitations and future research
Even though this study embodies theoretical findings and practical
implications regarding epidemic diseases outbreaks and their impacts
on restaurant firms’ value, still some limitations exist in this study. First
of all, this study includes only four types of food-related epidemic
diseases. As the main scope of this study was to measure the effects of
epidemic diseases that are directly related to the food ingredients (beef,
pork, and poultry), this study did not include other diseases, such as
SARS, O157, Botulism, and other types of foodborne diseases.
Second, the magnitude of the impacts of disease outbreaks on res-
taurant firms’ value may vary based on the types and diversity of menu
items (e.g., beef, pork, and poultry) sold in restaurants. However, this
study did not breakdown menu items of each restaurant firm in data
collection process. It could be a fruitful future research topic to consider
one or more dominant menu items that each restaurant firm is selling.
Third, brand reliability in this study was measured by CSR index.
Even though CSR index is used as a proxy of brand reliability widely in
hospitality and tourism area, there are more industry specific and brand
specific brand reliability proxies in business and marketing. In the fu-
ture studies, it can be a fruitful approach to explore more proxies and
adopt one based on characteristics of industries and purpose of re-
search.
Third, geographical restriction was the fourth limitation of this
study. In the case of avian influenza in 2004, it was restricted in the
state of Texas so that this event was not overwhelming enough to in-
fluence restaurant industry across all states. Future studies need to
conduct state-level analysis to investigate whether such regionally re-
stricted disease outbreaks also have significant impacts on value of
restaurant firms that have establishments operated in that specific area.
Furthermore, firm-level analysis could precisely measure value differ-
ence between firms that have distinct numbers of establishments in a
certain state. The two “micro-level” research approaches above could
provide industry practitioners more detailed guidance for risk reduction
during disease outbreaks.

Appendix A. Abnormal Return (AR) Results from the Market Model

Disease total Avian 04 BSE total BSE 03 BSE 04 BSE 06 BSE 12 Swine 09 Sal total Sal 12 Sal 13 Sal 14

t-3 0.17 −0.02 0.23 0.24 0.54 0.03 0.09 0.21 0.15 −0.48 0.49 0.40
t-2 −0.02 1.02 −0.05 0.06 −0.85 0.24 0.43 −0.15 −0.31 −0.44 −0.39 −0.12
t-1 0.19 0.84 0.31 0.31 0.14 −0.06 0.98 0.03 −0.19 −0.12 −0.45 −0.01
t0 −0.18 0.48 −0.25 −1.73** −0.24 0.09 1.01 0.62 −0.60** −0.85** 0.25 −1.17**
t1 0.03 0.55 −0.03 −0.20 −0.84* 0.54* 0.46 0.54 −0.25 −0.28 −0.10 −0.36
t2 −0.06 0.19 0.18 0.90** −0.49 0.70** −0.50 −2.04* 0.15 0.77 0.40 −0.58
t3 −0.31* −0.54 −0.16 0.50 −0.32 −0.24 −0.61 −1.64** −0.00 −0.10 0.34 −0.24
t4 −0.12 −0.46 0.10 −0.33 0.93 −0.11 −0.15 −1.57* 0.16 −0.53* 0.26 0.64
t5 −0.08 0.39 0.25 0.05 0.10 0.04 0.91 −0.21 −0.70** −0.83** −0.14 −1.21**
t6 −0.00 0.69 0.26 0.46 −0.50 0.63* 0.48 −1.93** −0.01 0.62* −0.45* −0.09
t7 −0.01 1.27** 0.14 0.63 0.09 0.04 −0.23 −1.55** −0.19 0.27 −0.22 −0.56*
t8 0.20 0.76 −0.35 −0.79* −0.67 0.11 −0.04 1.07* 0.51** 0.72** 0.54** 0.33
t9 −0.28* 0.37 −0.26 −0.75** −0.63* 0.45 −0.13 −0.12 −0.25 −0.55 −0.12 −0.10
t10 0.30 0.17 −0.33 0.30 0.05 0.04 −2.00 3.12* 0.28 0.19 −0.43 1.07*

Appendix A-2. Cumulative Abnormal Return (CAR) Results from the Market Model

Disease total Avian 04 BSE total BSE 03 BSE 04 BSE 06 BSE 12 Swine 09 Sal total Sal 12 Sal 13 Sal 14

t0 −0.18 0.48 −0.25 −1.73** −0.24 0.09 1.01 0.62 −0.60** −0.85** 0.25 −1.17**
t0~t1 −0.15 1.03* −0.30 −1.93** −1.07 0.62 1.47 1.16 −0.84** −1.13** 0.16 −1.53**
t0~t2 −0.21 1.22 −0.10 −1.03* −1.57 1.32** 0.97 −0.88 −0.70* −0.36 0.55 −2.10**
t0~t3 −0.52* 0.68 −0.26 −0.52 −1.88* 1.09* 0.36 −2.51* −0.70* −0.46 0.89 −2.34**
t0~t4 −0.64* 0.22 −0.16 −0.85 −0.95 0.98 0.21 −4.09** −0.54 −0.99* 1.15* −1.71*
t0~t5 −0.72* 0.61 0.09 −0.80 −0.85 1.03 1.12 −4.30** −1.24** −1.82** 1.01 −2.88**
t0~t6 −0.73* 1.30 0.35 −0.34 −1.35 1.65* 1.60 −6.23** −1.25** −1.21* 0.56 −2.96**
t0~t7 −0.73 2.57** 0.48 0.29 −1.26 1.69 1.37 −7.78** −1.44** −0.94 0.34 −3.53**
t0~t8 −0.53 3.34** 0.12 −0.50 −1.93* 1.79 1.33 −6.71** −0.93* −0.22 0.88 −3.19**
t0~t9 −0.83* 2.67* −0.14 −1.25 −2.56** 2.24* 1.20 −6.83** −1.18* −0.77 0.76 −3.29**
t0~t10 −0.52 3.04* −0.45 −0.95 −2.51* 2.30 −0.80 −3.71 −0.90 −0.58 0.33 −2.22*

39
J. Kim, et al.
Appendix B. Two-Way Fixed-Effects Analysis
CARity = α1 + α2CARity-1 + α3ADVit + α4TYPEit + α5ATit + α6INVit + α7NIit + υi + τt (1)
CARity = α1 + α2CARity-1 + α3ADVit + α4TYPEit + α5BRit + α6ATit + α7INVit + α8NIit + υi + τt (2)
where i = restaurant firm, t = year, y = event window, CAR = cumulative abnormal return, ADV = advertising expenditure divided by firm
revenue, TYPE = service type (0 = full service restaurants, 1 = limited service restaurants), BR = brand reliability measured as KLD scores,
AT = total asset, INV = inventory, NI = net income, υ = firm fixed-effects, and τ = time fixed-effects.
Table 5
Results from Fixed-Effects Estimation
Model 1 (N = 2,750)
AR term (CAR) 0.111**
ADV 1.496*
TYPE 3.331**
BR
AT −0.003
INV −0.155
NI 0.016
R2 0.293
F-statistics 8.97**
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