By Philippe Masset and Jean-Philippe Weisskopf, Assistant Professors at Ecole hôtelière de Lausanne, HES-SO // University of Applied Sciences Western Switzerland

The history of the hospitality industry, and especially hotel groups, over the last century has been synonymous with pioneering work and innovation to offer customers the best possible service. Individuals following a vision have created and developed companies that now have become household names across the globe. Today, group's ownership structures have however evolved and not only do families continue to own hotels but many corporations also exhibit a widespread ownership or are in the hands of institutional investors such as private equity funds or other financial institutions. These varying types of owners all have varying incentives, face various emotional and financial constraints and run their companies to satisfy their needs as adequately as possible. Consequently, financial policies of companies have been shown to be altered dependent on the type of owner.

One of the major decisions managers of hospitality companies have faced over the last two decades is the decision to embark on an asset-light strategy. Yet, today, we do not have a clear view on the influence different types of owners may have on this significant choice. In our study, "Ownership structure, asset intensity and firm performance" we analyse the impact different types of owners have on the asset intensity of hospitality groups and the effect this has on company performance and risk. We examine a sample of more than 150 stock-listed hospitality groups in the United States and fifteen Western European countries over the period 2004 and 2013 and offer several interesting insights:

  • The presence of a large shareholder is not uniform across sub-industries and countries

Our analysis shows that around 46% of lodging companies are family-owned, while this proportion drops to 23% for F&B firms. In total, around 14% of companies have an institutional investor as shareholder. The remainder takes the form of a fragmented, widespread ownership. The geographical position equally has a strong influence on ownership structures. More than 2/3 of companies in Continental Europe are family-run while only about 13% are widely-held. In Anglo-Saxon countries the proportions are inversed with 22% family firms and 2/3 exhibiting a widespread ownership.

  • Owner identity has an influence on asset intensity and its disposal

We observe that companies with a large shareholder in the form of a family or institutional investor display a higher asset intensity (i.e. are more asset-heavy) than those with a widespread ownership. We attribute this to an emotional bond of families towards their properties which hinders them to offer their buildings for sale. On the opposite, our findings suggest that financial investors are on the lookout for asset-heavy companies in order to dispose of properties to unlock some hidden value and increase shareholder returns.

  • Profitability increases but market performance is not affected by asset intensity

We confirm the popular belief of firm managers that asset-light companies display an increased profitability (measured as return on invested capital and return on equity) as well as a higher operating profit margin. However, asset intensity does not appear to have an effect on firm valuation (Tobin's Q) or total shareholder return.

  • Asset intensity has a limited effect on financial risk

Asset-heavy companies use more fixed assets and financial leverage, and should consequently exhibit an exposure to the real estate and debt markets. As such, one would expect them to be riskier than their asset-light counterparts. Our analysis however only partially supports this claim. While asset-light companies display higher interest coverage ratios and thus appear in a more comfortable financial position, their earnings and stock return volatility do not seem to be significantly lower.

  • The moderating role of ownership on performance and risk

Our findings on the relationship between asset intensity and firm performance and risk are moderated by the type of owner. Especially, the higher profitability of asset-light companies is more than offset by the presence of a large shareholder (family or institutional) which underperform widely-held companies. It, however, does not have an effect on firm valuation. We further observe that family firms display a higher share price volatility.

Overall, we find evidence that the various incentives and constraints different owners face have a strong influence on asset intensity and subsequently on corporate performance and risk.

Jean-Philippe Weisskopf
Ecole htelire de Lausanne