The Determinant of the Hospitality Industry's Unsystematic Risk: A Comparison Between Hotel and Restaurant Firms

Moderating effect of capital intensity on the relationship between leverage and financial distress in the U.S. restaurant industry

“…Especially, considering the restaurant industry's highly leveraged position and financial hardships during the current recession, this study's findings may provide industry specific and timely value. For example, contradicting some previous hospitality research findings (for example, Hsu and Jang (2008a) that contended capital intensity's increasing a firm's unsystematic risk), the current results support a positive view for capital intensity as a factor for reducing the degree of financial distress. Therefore, restaurant managers may consider increasing a portion of fixed assets compared to total assets as a valid strategy to manage a potentially distressing financial situation.…”

“…The literature, in general, suggested that leverage increases a firm's risk (Brealey and Myers, 1984;Mandelker and Rhee, 1984), and the aggravating effect of leverage on risk has also been found in the hospitality context (Kim et al, 2002;Hsu and Jang, 2008a). Considering Peterson's (1994) argument that an increase in a firm's risk leads to a high probability of financial distress, this study hypothesizes that a restaurant's greater leverage increases financial distress.…”

“…The literature often found a negative effect from leverage on firm performance, which implies that hospitality firms' leverage increases their risks (for example, Hsu and Jang, 2008b;Park and Lee, 2009;Tsai and Gu, 2007). Hsu and Jang (2008a) examined a more direct relationship between a firm's leverage and risk, and found an aggravating effect of leverage on a firm's risk in the hospitality context. However, Jensen (1989) argued for the existence of a tradeoff between advantages and disadvantages of leverage's impact on financial distress, and by using the agency argument, contended that benefits outweigh costs.…”

“…The effect of capital intensity on the degree of financial distress, however, can be assumed by adopting the literature of capital intensity and firm risk (e.g., Brealey and Myers, 1984;Hsu and Jang, 2008a;Lubatkin and Chatterjee, 1994). This assumption arises from the expected high correlation between firm risk and degree of financial distress suggested by Peterson (1994).…”

Corporate Governance, Ownership Structure, and Credit Ratings of Hospitality Firms

“…Although there are many advantages of having high levels of leverage, such as tax savings and reduced cost of capital, most often high leverage limits new investment opportunities and increases financial distress and credit risk (DeAngelo & Masulis, 1980;Hsu & Jang, 2008;H. Kim, Gu, & Mattila, 2002;Shivdasani & Zenner, 2005).…”