Does Hotel Ownership Structure Influence Capital Expenditures?

Hong Soon Kim · SooCheong Shawn Jang

19 citations0/0 files storedCornell Hospitality Quarterly

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Corporate Finance and Governance Financial Analysis and Corporate Governance Merger and Competition Analysis

Abstract

The purpose of this article was to provide an understanding of the ownership effect on firm investment in the hotel industry. Specifically, a linear relationship between institutional ownership and firm investment was investigated, while a nonlinear relationship between managerial ownership and firm investment was tested based on the convergence of interest and managerial entrenchment hypotheses. This study used two-stage least square (2SLS) regression for the model estimation because an endogenous relationship was suspected between managerial ownership and firm investment. The results of this study confirmed a positive relationship between institutional ownership and firm investment and an inverted U-shaped relationship between managerial ownership and firm investment with a maxima of 17.34%. The results of this study imply that firm investment is dependent on ownership structure. Furthermore, current shareholders should consider granting a stock ownership to managers up to 17.34% to encourage them to act in shareholders’ best interest while avoiding additional issues associated with high managerial ownership. The findings of this study provided empirical evidence that conventional short-term institutional investors hold a long-term perspective when investing in hotel firms, and managerial ownership is an effective measure to mitigate agency problems. Theoretically, this study provided empirical evidence that firm ownership has a causal effect on firm investment in the hotel industry. This finding is expected to expand our understanding of the corporate governance effect on firm behavior. Furthermore, this study confirmed the use of 2SLS regression in the presence of an endogenous relationship between firm ownership and investment.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1978Specification Tests in Econometrics 1977Determinants of corporate borrowing 1988Management ownership and market valuation 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?2003Corporate Governance and Equity Prices 1988Financing Constraints and Corporate Investment

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