Determinants of financial policy in the hospitality sector in the United States

Abstract

This article investigates the circumstances surrounding large investments by firms in the hospitality sector in the United States. The authors identify 400 large-scale investment events for firms in the restaurant, hotel, and recreation industries. During these events, firms increase their size substantially through building or acquiring assets. The authors determine that a combination of market and firm-specific factors lead to such events. Firms are more likely to engage in large investments when they have experienced strong recent sales growth and when they have lower existing leverage. These investments are more likely when the market is less volatile and when general economic conditions indicate strong consumer demand. Finally, the authors show that firms are more likely to rely on a combination of cash flow and debt financing to complete such investments, though firms experiencing higher sales growth are prone to use more equity financing.

Momentum investing: evidence from the US tourism and hospitality

“…This strategy focuses more on loyalty-based assets, such as technology, franchising and management contracts and less on physical assets such as hotels and restaurants. According to Li and Singal (2019), this strategy reduces risk because it helps corporations to grow and expand; (2) HT companies are characterized by high leverage due to large investments in fixed assets, higher risk and stronger competition compared with other industries and high in capital intensity (Ahmad and Adaoglu, 2018) and (Dewally, et al, 2017);…”

“…This means that the US hospitality stocks are sensitive to changes in the monetary policy in general and to changes in interest rates in particular. Dewally et al (2017) have found that hospitality companies prefer to undertake their large investments when the current sales growth is high, market volatility is low or the leverage is low. In the same context, Chen et al (2005) provide evidence that Taiwanese hospitality stocks are affected significantly by economic variables and monetary policy variables.…”

“…This strategy focuses more on loyalty-based assets, such as technology, franchising and management contracts and less on physical assets such as hotels and restaurants. According to Li and Singal (2019), this strategy reduces risk because it helps corporations to grow and expand; (2) HT companies are characterized by high leverage due to large investments in fixed assets, higher risk and stronger competition compared with other industries and high in capital intensity (Ahmad and Adaoglu, 2018) and (Dewally, et al , 2017); (3) It is among the sectors with the lowest cash holdings in the economy (Kim, et al , 2011); (4) It requires intensive initial investment because it invests heavily in facilities such as buildings and real estate to increase sales in current facilities, open new facilities and engage in acquisition (Dewally, et al , 2017); (5) the ratio of institutional and managerial ownership has lately increased substantially. More than 50% of hotels are owned by private equity funds, real estate investment trusts and institutional investors (Kim and Jang, 2018) and (6) Traditional macroeconomic variables have limited explanatory power to predict stock returns (Ersan et al , 2019).…”

“…(3) It is among the sectors with the lowest cash holdings in the economy (Kim, et al, 2011); (4) It requires intensive initial investment because it invests heavily in facilities such as buildings and real estate to increase sales in current facilities, open new facilities and engage in acquisition (Dewally, et al, 2017); (5) the ratio of institutional and managerial ownership has lately increased substantially. More than 50% of hotels are owned by private equity funds, real estate investment trusts and institutional investors (Kim and Jang, 2018) and (6) Traditional macroeconomic variables have limited explanatory power to predict stock returns (Ersan et al, 2019).…”

Financing Decisions and Performance of Italian SMEs in the Hotel Industry

“…A number of works-see, among others, Madan (2007), Jang et al (2008), Dewally, Flaherty, and Shao (2017), Karadeniz, Yilmaz Kandir, Balcilar, and Beyazit Onal (2009), Devesa and Esteban (2011), or Serrasqueiro and Nunes (2014)-have investigated the determinants of hotel firms' debt ratios to discern whether the observed decisions are consistent with the pecking order or the trade-off theory. All these studies report that, empirically, both theories contribute to explaining the observed financing behaviors of hotel firms.…”