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Recent research in hospitality nancial 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 nancial 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-identied keywords (i.e. debt, nancing, ownership) related to the major functions of nancial management, namely investing, nancing, and dividend decisions, as well as commonly indexed keywords in hospitality nance research. The paper then expanded the authors literature list through the reference lists of the studies that they initially identied. The authors limited their search to published studies between 1998 and 2009 and within hospitality journals written in English. Findings The paper identies 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 nancial management. The major categories of papers include hospitality nancing, investing, dividend policy, nancial 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 eld and suggests the need for further in-depth research to extend the literature and prompt better nancial decision making for practitioners. Originality/value Since Harris and Browns and Atkinson and Joness reviews of past hospitality accounting and nance studies which mostly focused on the former, hospitality nancial 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 nance 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 nancial management, Investing Paper type Literature review

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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 rms 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 prots. 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 rms future development opportunities, also play a signicant role in hospitality nance. The hospitality industry is fairly capital-intensive (Karadeniz et al., 2009; Lee, 2007), requiring managers at all levels to have adequate nancial management skills and access to strategies for achieving the goal of nancial management, namely value enhancement or creation for owners

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(Andrew et al., 2007). Nevertheless, given increasingly complicated operating environments and more sophisticated and educated customers and stakeholders, good nancial 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 nancial decisions and phenomena. Research in hospitality nancial 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 eld, and to explain the managerial implications of nancial 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 nancial management (with more focus on accounting than nance), some of this work has tended to be inward-looking, with inadequate methodologies and supercial results. Atkinson and Jones (2006) also noted in their review (with more focus on management accounting than nance) 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 nancial 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 Browns (1998) and Atkinson and Joness (2006) works, hospitality nancial 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 nancial 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-identied keywords related to the major functions of nancial management, namely investing, nancing, and dividend decisions (Chateld and Dalbor, 2005), as well as commonly indexed keywords in hospitality nance research. The 19 keywords included risk, return, rm performance, stock, bond, weighted average cost of capital (WACC), capital structure, bankruptcy, nancial, ownership, dividend, debt, nancing, equity, asset, growth, nancial management, shareholder, and corporate governance. We then expanded our literature list through the reference lists of the studies we identied. 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 nancial management, namely hospitality nancing, hospitality investing, and dividend policy studies. Studies relevant to nancial conditions and performances are also reviewed and discussed. The literature included in this paper is summarized in Table II. 2. Hospitality nancing Hospitality rms 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 xed-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 nancial service industry, a central issue for hospitality operators and investors is the uncertainty associated with the role of nancial institutions as suppliers of capital (Singh and Kwansa, 1999). Capital supply and demand has become a key research theme. 2.1 Debt nancing Elgonemy (2002) suggests considering four factors before seeking debt nancing: business risk, the need for exibility, owners risk aversion, and tax. First, the hotel business is highly inuenced by seasonality, economy, and management capability, among other factors, and the operating results of hotels can therefore uctuate 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 nancial distress but also the rms exibility 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 nancial distress emerges. Normally, it is cheaper to acquire debt nancing than equity capital. However, if the cost of debt becomes too high, or debt capital becomes more difcult to nd (as was the case during the global nancial crisis of late 2008 and early 2009), rms 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).

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Major function Financing

Area Debt

Sub-area Generic Long-term debt

Author Elgonemy (2002); Singh and Kwansa (1999) Dalbor and Upneja (2002); Dalbor and Upneja (2004); Jang and Kim (2009); Jang and Ryu (2006); Jang et al. (2008); Kim and Gu (2004); Tang and Jang (2007); Upneja and Dalbor (2001a); Upneja and Dalbor (2001b) Upneja and Dalbor (2001a); Jang and Kim (2009); Jang and Ryu (2006) Corgel and Gibson (2005); Kim and Gu (2004); Singh and Upneja (2007); Singh and Upneja (2008), Singh (2009b) Koh and Jang (2009); Upneja and Dalbor (1999); Whittaker (2008) Lee and Upneja (2008); Madanoglu and Olsen (2005); Madanoglu, Erdem and Gursoy (2008) Gu and Kim (2001); Gu and Qian (1999); Kim et al. (2007); Leung and Lee (2006); Oak and Dalbor (2008a); Skalpe (2003); Tsai and Gu (2007a); Tsai and Gu (2007b) Canina and Carvell (2008); Chathoth and Olsen (2007b); Jang and Tang (2009); Karadeniz et al. (2009); Kim et al. (2007); Lee zer and Yamak (2007); Madan (2007); O (2000); Sharma (2007); Tang and Jang (2007)

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Short-term debt Interest rate

Leasing behavior Equity Cost of equity

Ownership structure

Capital structure

Investing

Table II. Hospitality nancial management studies (1998-2009)

Borde (1998); Canina and Carvell (2008); Kim and Gu (2003); Lee (2008a); Madanoglu, Lee and Kwansa (2008); Mao and Gu (2007); Skalpe (2003) Systematic risk Barber et al. (2008); Borde (1998); Kim et al. (2002a); Gu and Kim (2002) Unsystematic Gu and Kim (2003); Hsu and Jang (2008); risk Kim et al. (2002a); Tang and Jang (2008) Foreign currency Chang (2009); Singh and Upneja (2007); risk exposure Singh and Upneja (2008) Interest rate risk Singh (2009a); Singh (2009b); Singh and exposure Upneja (2007); Singh and Upneja (2008) Merger and Canina (2009); Hsu and Jang (2007); Kim and acquisition Arbel (1998); Oak et al. (2008); Yang et al. (2009) Stock investment Chen (2007); Chen and Kim (2006); Chen et al. (2007); Chen et al. (2009); Chen et al. (2005); Denizci (2007); Gu and Kim (2003); Kim et al. (2002b); Upneja et al. (2008) Capital Ashley et al. (2000); Damitio and Schmidgall budgeting (2002); Guilding and Hargreaves (2003); Guilding and Lamminmaki (2007); Rubelj (2006) (continued )

Risk and return

Generic

Major function Dividend policy

Area

Sub-area

Author Borde et al. (1999); Canina et al. (2001); Dalbor and Upneja (2007); Kim and Gu (2009); Oak and Dalbor (2008b)

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Financial condition and performance

Bankruptcy

Firm performance determinants

CEO compensation and turnover

Dalbor and Upneja (2002); Dalbor and Upneja (2004); Diener (2009); Gu (2002); Jang et al. (2008); Kim and Gu (2006a); Kim and Gu (2006b); Upneja and Dalbor (2001a); Upneja and Dalbor (2001b); Youn and Gu (2009) Canina and Carvell (2008); Chathoth and Olsen (2007a); Chi and Gursoy (2009); Hua and Upneja (2007); Jung (2008); Kang et al. (2009); Ketchen et al., 2006; Kim et al. (2003); Koh et al. (2009a); Koh et al. (2009b); Lee, 2008(b); Lee and Park (2009); Madan (2007); Madanoglu, Erdem and Gursoy (2008); Madanoglu, Lee and Kwansa (2008); Mao and Gu (2008); McGehee et al. (2009); Park and Lee (2009); Prasad and Dev (2000); Tsai and Gu (2007a); Tsai and Gu (2007b); Youn and Gu (2007) Barber et al. (2006); Barber et al. (2009); Kim and Gu (2005); Gu and Choi (2004); Madanoglu and Karadag (2008)

Table II.

2.1.1 The use of long-term debt. The hospitality industry is capital-intensive and normally requires heavy debt nancing, particularly of long-term debt. In their study of US lodging rms debt choices, Upneja and Dalbor (2001b) tested three hypotheses (pecking order, trade-off (i.e. tax effects), and free cash ow) proposed by Barclay and Smith (1995). They showed that growth opportunities, rm risk, and xed assets were all positively correlated, and depreciation tax shields negatively correlated with long-term debt. They measured growth opportunities by the ratio of market value to book value of the rms assets (MVA), rm risk by the probability of bankruptcy, and xed assets by the ratio of property, plant, and equipment (PP&E) to total assets. Contrary to Barclay and Smiths suggestion that rms with greater growth opportunities should use less debt, Upneja and Dalbor found a tendency for lodging rms to use more debt to fund growth. This differs from restaurant rms (Upneja and Dalbor, 2001a) and other industries. To assess the appropriateness of using MVA as a proxy for growth opportunities, Dalbor and Upneja (2004) reexamined US lodging rms long-term debt decisions using ve different growth opportunity proxies and a different sample. While the relationships between the ve growth opportunity proxies and long-term debt decisions were mixed, the results, as claimed by the authors, supported the notion that the lodging industry is distinct in nancing its growth with long-term debt. Tang and Jang (2007) also supported this nding. Lenders likely feel more comfortable with real estate-type investments and with secured collaterals; furthermore, debt capital works better for controlling possible agency problems (Dalbor and Upneja, 2004).

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Nevertheless, identication 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 rms long-term debt decisions (Upneja and Dalbor, 2001b; Dalbor and Upneja, 2004; Tang and Jang, 2007) but also the liquidity of restaurant rms, for example (Chathoth and Olsen, 2007b). Hospitality rms in recent decades have noticeably expanded through management contracts and franchising agreements (excepting casinos; Beals, 2006), and through investing in physical assets. The power of intangible assets such as brand equity cannot be overlooked when hospitality rms maintain or seek growth. A good research question is whether or not traditional growth measures such as sales and asset growth can best reect the growth opportunities of hospitality rms of different types (e.g. hotels vs restaurants) and different ownership/management structures (e.g. management vs franchised) under different economic situations (e.g. favorable vs unfavorable). Firm quality (or risk of going bankrupt) and size have been found to be signicantly correlated to the long-term debt decisions of restaurant rms (Dalbor and Upneja, 2002) and lodging rms (Dalbor and Upneja, 2004). Both studies indicated that the lower quality of those rms (i.e. having a higher risk of bankruptcy) was probably caused by a higher level of long-term debt usage. Larger rms tend to use more long-term debt because they can afford the higher xed costs. Nevertheless, rm size was not found to be a signicant determinant of lodging rms long-term debt decisions by both Upneja and Dalbor (2001b) and Tang and Jang (2007). This could be because hotel rms primarily expand by franchising, which limits the types of assets to be nanced (Upneja and Dalbor, 2001b). Furthermore, hotel rms may nd it more convenient to expand using debt nancing if they lack internal funding, so that equity becomes a much more expensive route of nancing as market value increases. Hospitality rms with more investment in xed assets such as land, buildings, and properties have been found to use more long-term debt (Upneja and Dalbor, 2001b), which corresponds to the principle of maturity matching between assets and liabilities (Stowe et al., 1980). On the other hand, short-term assets are more likely to be nanced using short-term liabilities ( Jang et al., 2008). Such rms should be able to negotiate more preferable debt arrangements, regardless of the associated risks, than their counterparts with lower xed assets, because the latter can serve as collateral (Tang and Jang, 2007; Jang et al., 2008). Older and more protable rms with better cash ow seem not to need long-term debt (Upneja and Dalbor, 2001a). 2.1.2 The use of short-term debt. While current liabilities are closely related to a rms liquidity and net working capital, short-term debt nancing is a relatively less-studied topic. In their study of restaurant rms capital structure, Upneja and Dalbor (2001a) argued that total debt should be examined along with short- and long-term debt because of the operational uniqueness of restaurant rms. They showed that rms with a high probability of bankruptcy use more short- than long-term debt. Furthermore, short-term debt is negatively related to operating cash ow. This implies that restaurant rms should focus more on generating operating cash ow to replace or cover costly short-term debt. In their study of the interdependencies between investing and nancing decisions of US restaurant rms, Jang and Ryu (2006) explained the unique nancing behavior of restaurant rms. While their study generally supported the four cross-balance sheet interdependencies as found in other industries, they also claimed that restaurant rms

appear not to relate accounts receivable to short-term liabilities and that they nance their operational assets with stockholders equity in addition to accounts payable. However, their study results contrast with previous studies ndings that accounts receivable is highly related to accounts payable and that current liabilities usually nance operational assets. Jang and Ryus study was examined further by Jang and Kim (2009) to assess the rm size effect on restaurant rms nancing behavior. Jang and Kim found that small and medium restaurant rms rely more on accounts payable whereas large rms use more long-term debts, and that long-term assets relate to stockholder equity among large rms but relate to supplier credit among small and medium rms. Nevertheless, the reason behind the rm size effect on restaurant rms nancing behavior remains unclear. The lack of research on short-term nancing options in other hospitality segments suggests future research opportunities. The labor-intensive nature of hospitality businesses and the system of trade credit both contribute signicantly to their payables accounts (i.e. wages and accounts payable); short-term liquidity is critical. For example, casino rms rely heavily on cash transactions, but their operating cash ows can be quite uncertain and can uctuate signicantly on a daily basis. Insufcient cash ows generated from operating activities will likely trigger a need for short-term nancing such as taking advantage of revolving credit facilities. 2.1.3 Interest rate. Interest represents a tax shield benet to a rm. However, it could also cause nancial distress if debt nancing is not properly arranged and monitored. Interest rates determine the amounts paid and therefore are an important issue for rms making decisions about debt nancing. Corgel and Gibson (2005) showed that for hotel rms, the frequency of nancial distress from oating-rate nancing is less than or equal to that from xed-rate arrangements. They suggested that hotel owners should focus on managing nancial distress by aligning operating cash ow and debt-servicing obligations, within which oating-rate debt is preferred. Interest rate derivatives have been used by hotel rms to hedge against the risk exposure of interest rates. Singh and Upneja (2007) indicated that both variable-to-xed interest rate swaps and interest rate caps are used to hedge against rising interest rates. Singh (2009b) also highlighted that small, unrated rms are more likely to issue short-term debt and swap it into xed-rate debt to reduce exposure to interest rate risk. On the other hand, larger and higher-rated rms tend to swap from xed into oating-cash ow debt. Singh argued that smaller, unrated lodging rms that are more reliant on short-term debt in the form of oating-rate bank loans will nd long-term xed debt too costly. By issuing oating-rate debt and swapping it into xed-rate debt, smaller, unrated rms could benet from lower costs of both nancing and nancial distress, and reduced exposure to interest rate risk. Additionally, the proportion of oating-rate debt has been found to be positively and signicantly related to a rms decision to hedge (Singh and Upneja, 2008). In other words, rms with more oating-rate debt seem to be more likely to use derivatives to alter their exposure from oating- to xed-rate interest (Singh and Upneja, 2007). The topic of interest rate has been extensively studied in mainstream economic and nance research, and its role associated with the hospitality industry could be further examined. First, while interest rate has been viewed and employed as a workable lever in signaling the monetary policy of an economy, no investigation has examined how the hospitality industry has reacted to movements of interest rate in terms of

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borrowing or investing funds. Second, uctuations of the prevailing interest rate could affect investors assessments of a rms intrinsic value resulting from their perceived investment risks (Keown et al., 2005), thus possibly affecting rm value and stockholder wealth. The interplay between interest rate movements and stockholder wealth deserves empirical exploration. Third, while the hospitality industry appears to increasingly rely on corporate bonds since the commencement of the century (Kim and Gu, 2004), relatively less research has focused on how interest rate is related to bond issuance. The level of the prevailing interest rate not only affects the selling price of a bond, but also determines a bond investors yield to maturity (YTM). Kim and Gus study only examined nancial determinants of corporate bond ratings of hotel and casino rms, creating a need for future research on topics such as corporate bond issuance decisions. 2.2 Leasing behavior Leasing requires minimum upfront costs to acquire assets and provides tax advantages for some rms (Upneja and Dalbor, 1999). Firms in nancial distress may nd leasing a viable alternative to debt nancing when acquiring equipment. In their study of the leasing behavior of restaurant rms, Upneja and Dalbor (1999) showed that both beforeand after-nancing tax rates are signicantly and positively related to the use of capital leases, and both relate signicantly and negatively to the use of operating leases. Firms in good nancial standing are less likely to use operating leases. In other words, an increase in the use of operating leases may signal deterioration in a rms nancial health. The authors further indicated that rms 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. They also showed that the use of operating leases decreases as rm size increases but only up to a certain level, after which use increases with rm size. In contrast to the restaurant industry, less nancially distressed hotel rms are more likely to use operating leases as nancing instruments. The authors argued that using operating leases could serve as a management strategy, rather than a purely alternative nancing instrument. 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. However, empirical comparisons of leasing behaviors between different segments of the hospitality industry within the same economic situation could help further illuminate hospitality rms leasing decision-making. A number of investors are entering the sales and leaseback transactions (SLBT) market that provides alternative sources of funding for hotel rms. These investors, particularly private companies, have been using SLBT as means of acquiring or growing their portfolios (Whittaker, 2008). Meanwhile, hotel operators obtain cheaper funding because of the increased supply of lease funds available in the market and might therefore appear nancially healthy from a debt-equity ratio perspective. An operating lease is considered to be a type of off-balance sheet nancing, a term that is becoming better known since the Enron collapse in late 2001. The level of operating lease use may affect how creditors and investors use available information to evaluate a rm, its nancial condition, and its growth and earnings potential. This could be another topic for further investigation.

2.3 Equity nancing 2.3.1 Cost of equity. Despite the limitations of and criticism towards the use of the Capital Asset Pricing Model (CAPM) in estimating the cost of capital, it was popular with 65 percent of the Fortune 1000 companies in 1997 (Gitman and Vandenberg, 2000) and 60 percent of CFOs used it as their primary methodology (Graham and Harvey, 2001). Arguing for the unique operating characteristics of the lodging industry, Lee and Upneja (2008) compared traditional methods of estimating the cost of equity (i.e. CAPM and the Fama and French (FF) three-factor model) with the implied cost of equity (ICE) method. 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. In estimating the size effect on the estimation of cost of equity for casual-dining restaurants, Madanoglu, Erdem and Gursoy (2008) concluded that investors could expect a higher return from the large-rm portfolio using the CAPM, but a higher expected return from the small portfolio when using the FF model. However, their conclusion is limited for two reasons. First, the two models were not able to estimate the cost of equity for the 15-month period following September 11, 2001. Second, a short estimation period was used in their study. While the two models produced seemingly conicting results, the need for a hospitality industry-specic cost of equity model is justied. Considering the attributes that are particularly important for the lodging industry, Madanoglu and Olsen (2005) proposed a theoretical model for estimating the risk premium using the following ve constructs: human capital (Hcap), technology investment and utilization (Tech), brand strength index (BSI), safety and security index (SSI), and industry factors (IND). The rst three are posited to contribute negatively to the risk premium, and to SSI positively. The sign of the relationship between IND and the risk premium remains unknown. They also argued that companies with higher brand strength and that invest in and utilize technology more efciently will be able to achieve a lower cost of equity capital. They further introduced the Lodging Asset Pricing Model (LAPM) that incorporated two industry-specic variables to the Fama and French three-factor model excluding the HML (i.e. the difference between the returns on portfolios of high- and low-book equity/market equity stocks) variable. The LAPM is stated as follows: E Ri 2 Rf bi ERP sSMB iBSI pPOS where E(Ri) is the expected return of a security i, Rf the risk free rate, ERP the equity risk premium, SMB the size factor, BSI the brand strength index, and POS the property ownership structure. The LAPM, compared to other traditional pricing models, appears to have the merit of more appropriately estimating the cost of capital for the lodging industry specically considering the intangible nature of its products and services. However, the proposed framework needs further empirical validation to warrant its practical application. One potential issue is the measurement of the variables on the right hand side of the LAPM equation. For example, there seems to be no consensus in academic research on how brand strength should be measured for the lodging industry. This lack of consensus exists despite the fact that some hospitality rms (e.g. McDonalds, KFC, and Starbucks) brand values have been evaluated by commercial rms such as

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Interbrand (Interbrand, 2010) and that a few hotel brand equity studies (e.g. Kim et al., 2003; Prasad and Dev, 2000) have been conducted. Furthermore, the determination of the size factor could be challenging because many lodging rms expand through management contracts and franchising agreements in addition to investing in physical assets as noted above. 2.3.2 Ownership structure. One central issue for equity nancing is the topic of ownership structure and its impact on corporate governance and rm performance in light of the agency relationship. Although Demsetz (Harold Demsetz, personal communication, March 3, 2004) stated that there is no reason to expect small rms with highly concentrated ownership structures to perform better or worse than large rms with more diffuse structures, empirical studies in mainstream nance mainly support a positive relationship between ownership structure and rm performance. This relationship has been examined using multiple regression analyses to reveal signicant and positive relationships between managerial shareholdings and rm performance for both the restaurant (Gu and Kim, 2001) and hotel (Gu and Qian, 1999) industries. Both studies used multiple accounting measures (i.e. return on equity (ROE) and return on assets (ROA)) and stock returns as rm performance proxies and concluded that managerial ownership could be a proxy for the convergence of interests between managers and owners, and could help improve accounting protability and equity owners returns. Nevertheless, neither study considered other afliates such as creditors within the agency framework, nor did they address the possible endogenous relationship between ownership structure and rm performance. As a result, the regression coefcients obtained in these studies could be biased and their conclusions are potentially challengeable. Therefore, conclusions from Gu and Kims and Gu and Qians studies require further validation addressing the above-mentioned shortcomings. The increasing importance of institutions in the hospitality industry can be observed from the growing volume of equity that they control (Tsai and Gu, 2007a), and as a result, several studies have been conducted on institutional investors. Studying the Monday effect on tourism stocks, 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. They argued that by attracting more institutional investors, the volatility of tourism stock returns is reduced and the required rate of return for shareholders is lowered. Institutional investors preferences for lodging stock investment were examined by Oak and Dalbor (2008a). While institutions generally prefer large rms, different types of institutions favor rms with different nancial characteristics. For example, banks prefer lodging rms with low book-to-market value ratios, high liquidity, and high growth opportunities, whereas insurance companies favor those with high capital expenditure-to-asset and high debt ratios. Mutual funds, pension funds, and brokerage rms were also examined in their study. However, Oak and Dalbors study suffered from the oversight of possible endogeneity between the ownership and performance variables. The relationship between institutional ownership and rm performance in the restaurant (Tsai and Gu, 2007a) and casino (Tsai and Gu, 2007b) industries has also been studied. Considering the possible ownership endogeneity issue and applying both the ordinary least square (OLS) and two-stage least square (2SLS) approaches, both

studies showed that institutional ownership has a signicant impact on performance for both casinos and restaurants. They also showed that institutional investors tend to invest in better performing, larger, and more protable rms with low nancial leverage. Furthermore, they argued that institutional investors and creditors could substitute for each other in their monitoring roles with respect to management in corporate governance. Kim et al. (2007) found that the prot margin in restaurant rms depends on the level of ownership percentage and management type. Prot margin decreases as the level of primary ownership of the owner-manager decreases; however, it is higher for owner- than outside-manager rms. Prot margin is lower for owner-managed rms when the primary ownership percentage is under 50 percent. Skalpe (2003) argued that accommodation providers and restaurant keepers have aims other than maximizing returns, such as social prestige. Owners-managers personal values inuence their strategies and ultimately their rms performance. The ownership structure of a rm is a complicated issue. The level of various ownership types might affect corporate governance and the involvement of owners in rm management. This could inuence a rms strategic direction and its long-term bottom line. Of particular interest is institutional shareholding in the casino industry due to its strict regulation of signicant shareholdings and the potential inuence on corporate governance. Ownership-related issues such as block holdings, family holdings, and stock options could be interesting research topics in this eld. Another market worth investigating is China. 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. Despite their privatized status, these corporations are still signicantly inuenced by the state. Future studies could investigate the interplay of privatized enterprises with the state and the implications for rm performance and corporate governance. 2.4 Capital structure From a nancial perspective, capital structure is one of the most important determinants of a rms sustainable growth (Madan, 2007) because it relates to the cost of capital or the required rate of return for the rm. Chathoth and Olsen (2007b) showed that capital structure, along with environment risk and corporate strategy, helps explain a signicant amount of the variance in rms performance. Facing high nancial risks and volatile operating environments, it is important for lodging rms to determine the composition of their capital structure and the factors affecting leverage decisions and debt ratios (Karadeniz et al., 2009). A disadvantage of high nancial leverage is the higher borrowing cost associated with debt facilities and the resulting default risk. If a rms prots are low, the high risk of default pushes up the lending rate higher while increasing the interest costs (Madan, 2007). Madan (2007) also argued that rms with low share capital but high reserves and debt should either use their accumulated prots or issue fresh capital when contemplating expansion. The latter approach should help control their gearing ratio and reduce investors perception of risk, which could help improve ROE. In comparing the determinants of capital structure between US software and lodging rms, Tang and Jang (2007) showed that lodging rms leverage behavior did not signicantly respond to earning volatility, rm size, free cash ow, or protability

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

2.5 Evolution in hospitality nancing During the 1990-1991 recession, the hotel industry suffered from low occupancy rates, having overbuilt room inventory in the late 1980s (Hotel & Motel Management, 1994). Recovery had begun by late 1992 and the industry became protable again in 1993 (Block, 1998). Along with improved protability and performance, renovations of guest rooms, restaurants, meeting rooms, lobbies, and other public spaces were initiated using available cash ow and, more importantly, funding from increased institutional investment (Hotel & Motel Management, 1994). As a result, pension funds and life insurance companies became major sources of direct-equity capital for lodging real estate, while mutual funds, pension funds, and life insurance companies became the largest purchasers of lodging company stocks (Singh and Kwansa, 1999). Singh and Kwansa (1999) suggested that changes in the minimum loan sizes offered by nancial institutions are clear indications of the competitive landscape that is expected to prevail. The overall differences in minimum loans between large, intermediate, and small lenders have been progressively narrowing. For example, small lenders can provide a minimum of US$1 million while large lenders will offer US$5-10 million. Different types of nancial institutions can nance different types or modes of hospitality rms. For example, resort hotels have a high probability of borrowing from large lenders, given the expected growth in spending on tness, leisure, and recreation. Life insurance companies and pension funds have a high to moderate probability of nancing convention hotels, but a relatively low chance of being involved in casino hotels due to overbuilding, high cost of construction, and a preference to wait for more states to legalize gaming (Singh and Kwansa, 1999). Singh and Kwansas prediction for casino hotel nancing underestimated the growth potential of the casino (hotel) industry; the notion of if you build it, they will come seems to have held since the mid-1990s. The importance of private funding in the marketplace is expected to continue playing an important role in hospitality capital (Elgonemy, 2002). For example, in the casino industry, Harrahs was acquired for US$15.05 billion in 2006 by a private-equity rm owned by Apollo Advisors and TPG Capital. This was followed in 2007 by Station Casinos US$5.4 billion management-led buyout. In the hotel industry, one major buyout was that of the Four Seasons Hotels, which was taken private in 2007 by Cascade Investment and Kingdom Hotels in a deal worth almost US$4 billion. Issues related to the operations, management, and performance of these rms after the buyouts have not yet been examined, so there is a need for such evaluation. The importance of institutional investors to the hospitality industry has been heightened because they now control a signicant portion of lodging, restaurant, and casino equity (Hotel & Motel Management, 2002; Tsai, 2005; Tsai and Gu, 2007a; Tsai and Gu, 2007b). Continuing support from institutional investors can be expected, and their involvement and interactions with rms and their management could be investigated further, as could the possibility of differences in ownership structures and involvement in management and corporate governance in countries and regions other than the USA. 3. Hospitality investing Activities related to hospitality investing can be examined from two perspectives, namely the rm and its investors, although a majority of published studies focus on the latter. From a rm perspective, research has provided capital budgeting guides, practices, and benchmark comparisons (Guilding and Lamminmaki, 2007; Rubelj, 2006; Guilding and

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Hargreaves, 2003; Damitio and Schmidgall, 2002; Ashley et al., 2000). Capital budgeting relates to how rms respond to their operating and business strategies, appraise capital expenditure projects and make informed decisions that will bring value to the rm and shareholders. For example, Guilding and Lamminmaki (2007) demonstrated a positive relationship between hotel size and the use of nancial investment appraisal techniques. Regarding the formalization of capital budgeting systems and investment techniques, hotels are less developed in reviewing required rates of return and in applying post-completion audits. Studies from the investors perspective are more diverse and include topics such as risk and return and performance measurement, among others. 3.1 Risk and return Examining the restaurant industry in detail and categorizing it into three types (full service, fast food and economy/buffet), Kim and Gu (2003) showed that over the period 1996-2000, the full-service restaurant segment had the lowest total risk, as measured by standard deviation. However, in terms of three risk-adjusted performance measures (i.e. the Sharpe ratio, Treynor ratio, and Jensen index), the fast-food segment was ranked as the best performer, followed by full service and economy/buffet. Focusing on casual-dining restaurants alone, Madanoglu, Erdem and Gursoy (2008) found that large restaurants outperformed their smaller counterparts on a risk-adjusted basis during 1998-2002. In their study, they employed both traditional risk-adjusted performance measures (i.e. Sharpe, Treynor and Jensen) and contemporary risk-adjusted performance measures (e.g. the Sortino ratio and Fouse Index). On the sector level, Mao and Gu (2007) investigated the risk/return relationship in various industries of the hospitality sector during the economic downturn of 2000-2003. Four portfolio performance indexes (the Treynor index, Sharpe ratio, Jensen index, and appraisal ratio) were estimated to measure the rms risk-adjusted stock performances. The casino/gaming industry was found to have the highest return with medium risk, followed by the restaurant industry with mediocre return but lowest risk. The hotel/motel industry had the weakest performance but highest risk. The results of Mao and Gus (2007) study contradict the traditional wisdom that risk and return go hand in hand, as suggested by the CAPM. That is, a higher level of risk should be compensated by a higher level of return, if the investor is risk-averse. Other studies of the risk/return relationship present similarly contradictory results (Borde, 1998; Kim and Gu, 2003; Madanoglu, Erdem and Gursoy, 2008; Madanoglu, Lee and Kwansa, 2008; Mao and Gu, 2007; Skalpe, 2003). Madanoglu, Lee and Kwansa (2008) conrmed that a casual-dining portfolio allows investors to earn a higher return for a lower level of risk compared to the fast-food segment. Much of the risk related to hotel and restaurant investment is unsystematic (Kim and Gu, 2003; Skalpe, 2003). Canina and Carvell (2008) showed that restaurant operations or franchising have high levels of short-term nancial risk in terms of liquidity measures. In examining the relationship between four nancial risk factors and future performance as measured by ROA and ROE, Lee (2008a) found that strategic and stock performance risk factors represent a lodging rms nancial risk better than bankruptcy and rm performance risk factors. Furthermore, strategic and stock performance risk factors each have a signicant and negative predictive ability for future performance as measured by ROA. ROA outperforms ROE in estimating lodging rm performance in terms of its relationship with nancial risk.

3.1.1 Systematic risk. Dividing risks into systematic and unsystematic, and exploring their determinants in the hospitality industry, has been a popular research topic. For example, in studying hotel real estate investment trusts (REITs) beta (i.e. systematic risk) determinants, Kim et al. (2002a) showed that systematic risk is correlated positively with debt leverage and growth but negatively with rm size as measured by capitalization. The positive correlation between debt ratio and beta suggests that using less debt and pursuing conservative growth could reduce systematic risk for hotel REITs, while the negative relationship between capitalization and beta suggests that they have lower systematic risk and are less sensitive to market movements. Although synergy may enable large hotel REITs to benet from low operating and capital costs, geographical diversity can help them achieve revenue stability (Kim et al., 2002a). Using nancial data from 75 US restaurant rms from 1996-1999, Gu and Kim (2002) applied weighted least-squares regression analysis to examine systematic risk determinants. They showed that restaurant systematic risk correlates negatively with asset turnover but positively with quick ratio. High efciency in generating sales revenue helps to lower systematic risk while excess liquidity tends to increase it. Echoing Gu and Kim (2002), Barber et al. (2008) showed that efcient use of existing restaurant assets is the key to risk reduction and value enhancement. They argued that properly investing excess cash ow in operating assets and high asset turnover could lower systematic risk, whereas director turnover could increase it (depending on a rms state of development). Liquidity level is positively related to both systematic and total risk (Borde, 1998; Barber et al., 2008). High liquidity may imply that available resources are being invested in marketable securities, which could increase risk, and are not invested in high-earning operating assets. The dividend payout ratio is negatively related to both systematic and total risk (Borde, 1998; Barber et al., 2008). Firms are typically reluctant to vary their dividend payouts signicantly once a certain level has been established, especially if this means cuts. Restaurants with a high level of operating risk are likely to distribute a smaller fraction of their earnings than those with lower risk. However, leverage seems to be unrelated to either systematic or total risk since it has little inuence on market-based risk measures. Estimation of the systematic risk for a capital investment, as compared to that for a rms stock, can be quite challenging because there might not be existing or historical references available. The estimation can become even more complicated when the impact of nancial leverage is included (Van Horne, 2002), which further affects the calculation of the cost of equity and capital. No published studies exist that assess the appropriateness of using various methods of estimating the systematic risk for a capital investment as suggested in nance textbooks. Future research could meet this need if empirical data become available. 3.1.2 Unsystematic risk. Studying hotel REITs risk features, Kim et al. (2002a) found that 84 percent of their total risk could be attributed to rm-specic, or unsystematic, risk. The proportion of unsystematic risk in the total risk of hotel REITs is higher than that of other US stocks. Gu and Kim (2003) indicated that hotel REITs unsystematic risk is associated positively with debt and dividend payouts but negatively with capitalization. That is, hotel REITs with higher debt leverage could be subject to greater stock volatility when rm-specic events occur. Furthermore, large hotel REITs

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are less risky in terms of unsystematic risk. The authors suggested that consolidation, via mergers and acquisitions, could quickly increase a hotel REIT rms market capitalization and consequently help reduce unsystematic risk. Their results also suggest that the market reacts more strongly to rm-specic events affecting hotel REITs paying higher dividends. Higher dividend payout could increase unsystematic risk, and hotel REITs must carefully consider the effect of this on investment capital and nancing mix, and on unsystematic risk. The authors argued that large hotel REIT rms paying lower dividends and using less debt are likely to have a valuation advantage. Tang and Jang (2008) compared hotel C-corporations and REITs in terms of the protability impact of their requirements and showed that the latter pay less tax and have higher levels of xed assets, ownership diversication, and dividend payout ratios. They suggested that the relationship between protability and dividend payout might be nonlinear. Hotel REITs not only pay more dividends than required but can also pay more than their net income, because of extra cash from depreciation. Moreover, the only signicant variable affecting the ROA of hotel REITs and C-corporations is the different dividend payout. ROA increased more quickly in C-corporations for the same amount of increase in payout, implying that this decreases free cash ow associated agency costs faster than for hotel REITs. Comparing the unsystematic risk determinants of the hotel and restaurant industries, Hsu and Jang (2008) showed that protability is the most inuential factor. That is, more protable hospitality rms suffer less unsystematic risk. Financial and operating leverage and rm size are also signicantly associated with the unsystematic risk of the hospitality rms studied. Previous studies focused on examining the relationship between a rms unsystematic risk and its nancial features. However, unsystematic risk is rm-specic, and future studies could explore how nonnancial features of a hospitality rm relate to its unsystematic risk. For example, Rego et al. (2009) found that consumer-based brand equity has a stronger role in predicting rm-specic unsystematic risk than systematic risk. 3.1.3 Foreign currency risk exposure. Foreign exchange uctuations are an important determinant of risk for hotels operating internationally. Occupancy may decline in strong currency environments, and the resulting loss could be compensated for by gains in exchange. A weak local currency may threaten dollar-denominated earnings, and managers can make up for currency loss by increasing the average daily rate (ADR) without reducing occupancy. Although about 60 percent of foreign exchange risk exposure could be attenuated or even eliminated (Chang, 2009), very few hospitality rms manage such risk, because either the amount is immaterial or it is not cost effective to use derivatives (Singh and Upneja, 2007; Singh and Upneja, 2008). Singh and Upneja (2007) suggested that few lodging rms use derivatives such as forwards to hedge against foreign exchange risk exposure. They showed that the foreign sales ratio and diversication measures of a rm provide weak evidence for their use of derivatives, and that hospitality rms with higher growth opportunities will use derivatives more. However, rms have less incentive to take this approach if they have enough internal cash ow to cover xed claims and fund future investment (Singh and Upneja, 2007). Various currencies, such as the Australian dollar, Chinese yuan, and Japanese yen, have experienced volatile uctuations in recent years and the gain or loss from such

noticeable currency uctuations might no longer be viewed as immaterial. Case studies of the impact of currency uctuations on those hospitality rms investing and operating internationally could reveal the cost and benet of managing currency risk. Another possible issue for future research into hedging is commodities. There appear to be no studies that explore how restaurant rms purchase futures on commodities to protect themselves against uctuation in food and beverage costs. 3.1.4 Interest rate risk exposure. Interest rate risk represents the most signicant source of market risk for many lodging rms (Singh, 2009b; Singh and Upneja, 2008). Two main sources of this risk are debt obligations and nancial investments. Most interest rate exposure comes from oating-rate bank loans because changes in rates can increase the volatility of cash ow and earnings in an uncertain interest rate environment. Many hospitality rms use a mix of short-term oating and long-term xed debt to mitigate their risk exposure (Singh, 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, 2009b; Singh and Upneja, 2008). Studying lodging rms use of derivatives in managing interest rate risk exposure, Singh (2009a) showed that rm size, oating-rate debt, interest coverage ratio, book-to-market ratio, and foreign sales ratio are important determinants of interest rate exposure. A signicant and negative relation between the use of derivatives and interest rate exposure implies a reduction in risk as the magnitude of derivative use increases. Interest rate exposure, along with yield spread and debt rating, is a signicant determinant of a rms interest rate derivative positions (Singh, 2009b). Market-to-book ratio signicantly affects the amount that lodging rms hedge (Singh and Upneja, 2007). Underinvestment costs, nancial distress costs, managerial risk aversion, information asymmetry, cash-ow volatility, proportion of oating-rate debt, foreign sales ratio, and rm size are all signicant determinants of hedging decisions (Singh and Upneja, 2008). Larger rms are more likely to hedge, given the economies of scale available to a business with high cash-ow volatility. Research on risk and return research can be expected to develop further, as investors weigh costs and benets in response to an ever-changing business environment. The increasing complication of the agency framework (including lender, manager, and owner) further challenges traditional thinking about the positive relationship between risk and return. As well as including nancial variables when measuring this relationship, future studies could include nonnancial variables and consider the interplay of the parties in the agency framework, along with environmental risk factors. While the prevailing interest rate has been set at historical low because of the most recent global nancial crisis, it would be interesting to observe how hospitality rms react to or hedge against foreseeable interest rate hikes in the years to come. 3.2 Mergers and acquisitions There has been a long history of mergers and acquisitions (M&A) activities in the hospitality industry (Andrew et al., 2007). The goal of M&A is to improve overall performance and contribute to the realization of shareholder value maximization (Hsu and Jang, 2007). As pointed out by Canina (2009) and Yang et al. (2009), the major benets to owners, shareholders, and institutional investors are economies of scale and synergy, resulting in reduction of expenses and the cost of capital. However, such

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expectations are less often realized due to issues with corporate culture or leadership conict. Canina (2009) showed that over two-thirds of M&A deals fail to create shareholder value, with failure usually occurring when rms attempt to combine operations. There is growing recognition that all expected value creation, if any, takes place after acquisition rather than at the initial stages (Canina, 2009). Yang et al.s empirical review of 19 hospitality M&As showed that acquirers received positive abnormal returns 12 months post-merger. In their study of 15 acquiring rms using market measures and 23 rms using accounting measures, Hsu and Jang (2007) found no evidence that M&A beneted rm performance measured by short- or long-term stock returns and protability. Furthermore, performance deteriorated after merger. Not only did equity value decline in the long term, but also there were additional reductions in long-term protability. Furthermore, no signicant relationship was identied between merger announcements and change in short-term equity value. Mergers also failed to generate better ROA or ROE for the acquiring rms. However, the ndings of Yang et al. (2009), using industry indices over the period 1996-2007, indicate signicant long-term positive gain for acquiring rms. Although 75 percent of hospitality acquisitions are cash nanced (Oak et al., 2008), Yang et al. (2009) showed that stock offers are preferable to acquirers equity value overall. Oak et al. (2008) further showed that acquiring rms with a higher debt ratio are more likely to use cash than stock payments. Hospitality rms with a lower price-to-book ratio, higher growth resource imbalance, higher capital expenditure ratio, and larger size are found to be a more likely target for M&A (Kim and Arbel, 1998). Because M&A has been one of the fastest ways that rms expanded in the last decade, involving signicant capital and leaving virtually no room for failure, more empirical studies of the hospitality industry could explore why so many rms continue to pursue the M&A strategy despite disappointing results as noted in Canina (2009) and Hsu and Jang (2007). Some M&A activities in the casino industry (e.g. MGM Mirages acquisition of Mandalay Resort Group in 2005) could be a good case study for understanding this phenomenon. Additionally, the topic of hostile takeover could be investigated. It would be interesting to investigate the tactics (e.g. greenmail and poison pills) that could be employed by management to avoid hostile takeovers (Andrew et al., 2007). 3.3 Hospitality stock investment Investors in hotel stocks care not only about risks and returns but also the determinants of volatility. From a macroeconomic perspective, money supply and unemployment rate have been shown to signicantly explain the movement of hotel stock returns (Chen et al., 2005; Chen and Kim, 2006; Chen, 2007). Changes in unemployment rate reect the strength of the economy and signicantly correlate with hotel stock returns in restrictive monetary periods in Taiwan (Chen, 2007). An increase in unemployment symbolizes a sluggish economy and is accompanied by a decrease in stock returns. The increase in money growth results in a wealth effect, which in turn tends to stimulate consumption and production and increase investment. Furthermore, hotel stocks exhibit higher mean return and reward-to-risk ratio during expansive monetary periods. Chen et al. (2005) indicated that non-macroeconomic variables such as political events, natural disasters, and international sports events have a more signicant impact on hotel stock returns than macroeconomic factors. For instance, a

study of Taiwanese hotel stock performance after the SARS outbreak by Chen et al. (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. 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. Kim et al. (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. They advised that hotel REITs must be very cautious about the nancial risk associated with debt leverage and the negative impact of new equity issues. High debt leverage could greatly increase investment risk because of uncertainty about a hotel REIT rm, particularly if rm-specic events occur, such as contract loss and earnings alerts, that may cause a drastic decline in stock (Gu and Kim, 2003). 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., 2009). 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. The authors argued that hospitality stock investors should pay more attention to underlying performance in terms of EPS. They also demonstrated a long-term relationship between stock prices and EPS, and that EPS signicantly predicts changes in stock returns for the hospitality industry. Similarly, Upneja et al. (2008) demonstrated a signicant and positive relationship between earnings manipulation indicators and stock price increases for restaurant rms. Repricing stock options can also send certain messages to investors. Denizci (2007) showed that hospitality companies are more likely to reprice stock options after a stock price decrease accompanied by a market-wide fall, compared to a control sample of companies matched by size and price decrease. She found that repricing rms are signicantly smaller (in terms of market capitalization) and have lower stock price returns and dividends per share. Hospitality stock investment is rather complicated, because the volatility of investment values can be attributed to many factors using either technical or fundamental analysis. While advanced mathematical models (e.g. Chen et al., 2007; Chen et al., 2009) have been introduced and tested with empirical data to offer investors some guidance, it should be noted that stock price movements reect investors predictions and speculations for a rms future. That is, individual judgment, whether rational or not, plays an important role in investment decisions. For example, Tsai and Gu (2007c) argued that the interplay between stock market investment and casino gaming activities is a result of wealth and substitution effects. Future studies could also study hospitality stock investment qualitatively to explore the relevant factors. 4. Hospitality dividend policy Firms reward investors through cash or stock dividends or stock price appreciation. Using logistic regression analysis to examine the nancial features of rms that did and did not pay dividends, Kim and Gu (2009) showed that rm size (measured by total assets) and protability (measured by ROA) are signicant drivers of dividend payout

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decisions for US rms, while investment opportunities deter them from paying. These results are consistent with those of Borde et al. (1999) and Dalbor and Upneja (2007) in terms of the effect of rm size on dividend payout decisions and those of Canina et al. (2001) on investment opportunities and protability (i.e. earnings). In other words, larger rms with higher protability but fewer investment opportunities are more likely to pay dividends. Smaller and less protable rms with more investment opportunities are less likely to pay dividends because they need to retain earnings to pursue growth. Canina et al. (2001) argued that the average dividend payout for lodging rms is less than for other rms in the market due to higher investment requirements, highly volatile income, and/or high interest payments. Similar to Canina et al. (2001), Dalbor and Upneja (2007) found a negative relationship between total debt and dividend payout in the US restaurant industry and a positive relationship between rm size (measured by number of shareholders) and dividend payout. They argued that the latter could be a substitute for interest payments and serve as a mechanism to constrain management within the agency framework. Dividend initiations and increases imply an appreciation in rm value, so the market reacts positively. Equally, the market reacts negatively to announcements of dividend decreases (Borde et al., 1999; Canina et al., 2001). Borde et al. (1999) cautioned that changes in dividend policy could affect the availability of capital to fund growth. While investors perceive higher payouts positively, rms might need to seek funding in the capital market if unforeseen opportunities emerge. Comparing lodging corporations and REITs in terms of the impact of dividend policy on institutional shareholdings, Oak and Dalbor (2008b) found that institutional investors tend to prefer REITs, most likely due to REITs committing a xed percentage of earnings paid out as dividend. Hospitality rms dividend policies have been far less studied than their nancing and investment. How rms utilize operational earnings sends different messages to their investors. While paying out more dividends would please stockholders, it could also indicate that the rm has few or no value-creating opportunities ahead, signaling low growth. However, 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, as could capital reduction, which triggers dividend payments, stock price appreciation, and increases in other performance measures such as ROE. An example of this occurred during Formosa International Hotels Corporation of Taipeis capital reductions in 2002 and 2006 (Taipei Times, 2009). 5. Financial conditions and performance 5.1 Bankruptcy Given the sectors capital-intensive nature, sensitivity to the economy, and seasonality, rms are under signicant pressure to generate enough operating cash ow to meet short- and long-term debt obligations, including both interest and principal payments. Firms that fail to do so face various consequences including bankruptcy, and insolvency has become a popular research topic. The probability of bankruptcy is positively correlated with long-term debt in both the restaurant (Dalbor and Upneja, 2002) and lodging (Upneja and Dalbor, 2001b; Dalbor and Upneja, 2004) industries. More leveraged rms are more vulnerable to failure, especially when there is a nancial shock. Jang et al. (2008) conrmed that

lower leverage and higher cash levels can reduce the risk of insolvency. However, Upneja and Dalbor (2001a) showed that restaurant rms with more short- than long-term debt are more likely to go bankrupt, most likely due to a greater problem with information asymmetry. Using a multiple-discriminant analysis model, Gu (2002) showed that restaurant rms with lower earnings before interest and taxes and higher total liabilities (i.e. debt-burdened) are candidates for bankruptcy. This argument was supported by Kim and Gu (2006a, 2006b) and Youn and Gu (2009). Kim and Gu (2006b) argued that what matters in restaurant bankruptcy is long-term debt; the more a rm relies on debt nancing, the higher its interest expenses, the lower the interest coverage ratio, and the higher the probability of failure. Comparing Gus (2002) multiple-discriminant analysis model of restaurant bankruptcy, Kim and Gu (2006b) claimed that the logistic model is preferred because of its theoretical soundness, although both models give similar results. Comparing a logistic regression model predicting the failures of Korean lodging rms, Youn and Gu (2009) showed that the articial neural network model outperforms the logistic model in terms of reduced Type II errors. They stated that interest coverage is the most important signal of business failure in the Korean hotel industry. Kim and Gu (2006a) argued that nonnancial factors such as geographic diversication and market segmentation may also help predict bankruptcy because they are likely to inuence the rms nancial variables and, ultimately, performance. 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. He argued that many other issues, such as utilities, critical vendors, and taxes could inuence this, as could owner-debt relations or favorable economic factors. While some nancial variables clearly signal rm failures and have been well examined in previous studies, there is need for further investigation of non-nancial issues related to hospitality rm bankruptcy, such as those that have been conducted in mainstream business (Wu, 2004). 5.2 Firm performance determinants Firm performance has been a popular research variable. Depending on the context, it can be measured from the accounting (such as ROA) and nance (stock returns) perspectives, or a combination of both (such as Tobins q). Hospitality researchers have been interested in what nancial attributes lead to better performance. For example, institutional shareholding and rm size are signicant and positive determinants of rm performance (as measured by a proxy for Tobins q) in both the restaurant and casino industries, while debt has a positive performance impact on the latter only (Tsai and Gu, 2007a; Tsai and Gu, 2007b). Mao and Gu (2008) indicated that nancial leverage and activity are signicant determinants of performance (as measured by a proxy for Tobins q) of US restaurants. They concluded that larger rms, with higher liquidity, asset turnover, protability, and faster growth, tend to have higher values. Financial leverage has a signicant but negative effect on restaurant rm performance, implying that heavy indebtedness tends to reduce rm value in the capital market. From the accounting perspective, 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. Canina and Carvell (2008) argued that

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static measures of liquidity, such as current and quick ratios, might be less useful in assessing a rms ability to cover current obligations. For unlisted companies, where there is no market price data available, ROE is still the best and most reliable tool to determine nancial performance (Madan, 2007). Youn and Gu (2007) showed that Korean lodging rms operating costs are too high and operating prot margins too low, negatively affecting ROA. Researchers have recently started examining the potential determinants of rm performance using non-nancial factors (Mao and Gu, 2008). From a human resources management perspective, for example, Chi and Gursoy (2009) suggested that greater employee satisfaction could indirectly improve nancial performance, as mediated by customer satisfaction. They claimed that the higher the customer satisfaction, the better the rm performance, indicating a key internal performance-enhancing success factor for any service company. Corporate social responsibility (CSR) activities show a positive and simultaneous relationship with rm value and protability for hotel companies (McGehee et al., 2009; Kang et al., 2009; Koh et al., 2009b), but not casinos (Lee and Park, 2009). However, the ndings of Park and Lees (2009) study of the restaurant industry contradict this, indicating that CSR has a U-shaped effect on long-term accounting performance, but no impact on rm performance. There are other various nonnancial factors, such as internationalization (Lee, 2008b; Hua and Upneja, 2007) and franchising (Koh et al., 2009a; Ketchen et al., 2006), that could be linked directly or indirectly to performance and could be examined alongside nancial issues. 5.3 Chief executive ofcer 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. Gu and Choi (2004) showed that chief executive ofcer (CEO) cash compensation in casino rms is positively correlated with protability (measured by ROA), rm size (total assets), debt leverage, and stock options but negatively associated with revenue efciency, as measured by asset turnover. While the rst of these correlations is consistent with the PRP principle, an insignicant relationship between stock performance and CEO compensation was observed, which indicates otherwise. Nevertheless, an insignicant positive association between stock options and stock performance suggests that the former could drive the latter. In examining CEO cash compensation determinants in the US restaurant industry, Kim and Gu (2005) showed that of 12 potential variables, only rm size (measured by the log of total assets) and operating efciency (measured by asset turnover ratio), are signicant determinants. Firm size serves as a control variable rather than a performance indicator. PRP is not in evidence with respect to prots and stock performance; however, CEOs are better rewarded in terms of revenue generation efciency. Barber et al. (2006) examined the relationship between CEO compensation (including salary, bonuses, restricted stock values, value of options, and other sources) and nancial performance for the restaurant industry. Their results contrast with those of Kim and Gu (2005) because they found a positive but weak correlation between CEO compensation, gross revenue, net income, and stock price. The authors claimed that stock price is a signicantly stronger predictor of CEO compensation. Madanoglu and Karadag (2008) assessed the relationship between changes in CEO compensation from period to period rather than from rm to rm. They measured CEO PRP sensitivity

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

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merit because stakeholders such as creditors, owners, or managers might have different views about how and what nancial decisions should be made (Andrew et al., 2007). Industry-specic regulations and restrictions in shareholdings (such as the case of the casino industry on block ownership; Tsai and Gu, 2007b) can affect such areas as debt nancing and corporate governance, which subsequently play a part in driving rm performance. However, 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, given that mainstream nance researchers have already examined the same problems and issues. Studies of this type contribute minimally, if any, to the body of knowledge. Financial features as determinants of hospitality rm events (e.g. failure) or behavior (e.g. nancing) have been well examined in the reviewed studies. Some hospitality nance researchers have explored hospitality rms nonnancial features (e.g. geographic diversication and owner-lender relation) and nancial ones as drivers of rm events or performance. The models constructed in the reviewed studies could serve as benchmarks for industry practitioners in gauging their past rm performance and condition because most studies were conducted on a macro level using samples at the industry level. Little evidence of new theory development in hospitality nancial management research was noted in Atkinson and Joness (2006) work. Our review of past studies highlighted the development of new theories. For example, Jang and Ryu (2006) and Jang and Kim (2009) showed contradictory evidence against the separation theorem between a rms investing and nancing decisions (Modigliani and Miller, 1958; Tobin, 1958). Madanoglu and Olsens (2005) proposed LAPM contributed better understanding and estimation of the cost of equity for the lodging industry. It is expected that hospitality nance researchers could contribute more by developing new theories in the future, whether these theories are industry-specic or not. One noticeable area receiving little attention over the past 12 years is the domain of asset management. While asset management has become a eld of expertise and profession within the nancial management arena in the USA (Andrew et al., 2007), not many studies identied in our review examined asset management-related issues or the underdevelopment of asset management in other continents such as Asia. Nevertheless, one related work is Bealss (2006) introduction of hotel real estate nance and investments on topics related to operating leverage, nancial leverage, tax issues, owner-franchisor and owner-operator relations, and others. Empirical investigation of hospitality real estate nance and the development of REITs in Asia could be good topics to explore. The emergence of hotel REITs introduced in places such as Hong Kong (e.g. Regal REIT) and Singapore (e.g. CDL Hospitality Trusts) in the past few years may warrant case studies.
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