HOW SIZE AFFECTS THE PERFORMANCE OF HOSPITALITY FIRMS

Abstract

Abstract With Governments actively promoting tourism, the hospitality sector in Asia-Pacific has grown dramatically. This has paved the way for extensive acquisition and expansion of hotels in the region. This study examines the relationship between size and performance of firms in the hospitality sector. On one hand, scale economy theory suggests that being large is good because it reduces a firm’s business costs and increases its market dominance. On the other hand, growing too big could lead to problems associated with diseconomies of scale. Moral hazard theory further suggests that hoteliers pursue an aggressive growth and expansion path due to managerial opportunism, which may not be aligned with the best interests of shareholders.

The study covers 64 hospitality firms publicly traded in nine markets between 2006 and 2009. They include China, Canada, Japan, Hong Kong, Singapore, Taiwan, Thailand, United Kingdom and United States. The empirical tests are divided into three stages. First, Asia Pacific region has displayed potential growth in hospitality sector. In terms of total and risk adjusted return, Singapore and China hospitality market recorded highest return. Second, employing both univariate and multivariate analyses, it was observed that firm size has a positive impact on corporate performance, as measured by total returns or risk-adjusted returns. Third, the impact of the size factor on corporate performance seems to be stronger in the case of hospitality firms that are structured as real estate investment trusts (REITs) due to its diversification strategy.

Key words: size, corporate performance, total return, risk adjusted return, hospitality sector, REITs