Journal of Hospitality Financial Management: Volume 13, Issue 1
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True Market Value of Lodging Stocks: A Convergence Approach
(2005-01-01) Hua, Nan; Upneja, Arun
The discounted cash flow model (DCF) has been one of the most frequently used models in the area of asset pricing. (Cornell B., 1993; Grant, 2003; Kim, 1986; Weaver, 1989) However, there is an inherent circularity problem where one needs to know the weighted average cost of capital to estimate the firm value and one needs to know the firm value, specifically the equity to debt ratio, to estimate the weighted average cost of capital. Mohanty (2003) proposed a hypothetical approach to solve the problem. The approach may have important empirical implications to the lodging stock market. If parameters in the approach are estimated reasonably accurate, the estimate from the approach will be able to serve as a critical trading criterion for lodging stock selections.
An Analysis of the Major Equity Valuation Models as Applied to the Lodging Industry
(2005-01-01) Upneja, Arun; Lee, Seoki
Very few academic studies have systematically attempted to evaluate equity valuation models in the lodging industry. Most academic papers in the mainstream finance and accounting literature either exclude hospitality firms or do not examine it in detail. For example, it is very common to find academic papers that exclude all service sector firms. Lodging sector has many characteristics that differentiate it from other economic sectors in the US. For example, lodging is very capital intensive, however, the performance is heavily dependent upon the quality of the service interaction with the customers. Therefore, we cannot directly conclude that the results of research that has excluded lodging firms can be extended to lodging firms. Two of the main generic models used in academic research are the discounted free cash flow valuation model and the abnormal earnings valuation model. Many researchers have used these models to generate valuation for publicly traded firms, for example, Francis, Olsson and Oswald (2000) and Penman and Sougiannis (1998). The Francis et al. (2000) paper attempts to compare the relative accuracy, consistency and explainability of three kinds of models. However, Lundholm and O’Keefe (2001) show that if properly implemented, all valuation models should get similar estimates of equity value. Other papers support their conclusions. The main purpose of this paper is to explore the major equity valuation models developed in the mainstream accounting and finance literature, operationalize them for the lodging industry, systematically examine and operationalize the assumptions needed for each model and finally examine the forecasting ability of these models on lodging firms. The study selects two widely used equity valuation models, discounted free cash flow and abnormal earnings models.
Does Wall Street Truly Understand the Lodging Valuation?
(2005-01-01) Lee, Seoki; Upneja, Arun
Lodging stock undervaluation has been a longstanding issue in the hotel industry. Many market experts and industry educators and managers have participated in, or at least been exposed to, discussions and/or arguments over this issue. In summary, the proponent of lodging stock undervaluation contributes the occurrence to Wall Street’s lack of comprehension of the lodging business. The opponent dismisses this claim by stating the unlikelihood of Wall Street having such extensive knowledge on all industries except this particular industry. As to which view is correct is an empirical question and therefore, it would be a safe assumption that empirical studies have been conducted investigating the issue when considering the importance of the issue. Therefore, it is the main purpose of this study to investigate whether or not lodging stock is in fact undervalued. We used a sophisticated equity valuation method to examine the undervaluation issue by comparing lodging firms to firms in the rest of the industries. To empirically accomplish the main goal of the study, an equity valuation model, specifically the residual income (RI) model, was employed. By utilizing the RI model with historical financial data, estimated equity values were computed and compared to actual market values on both the lodging firms and non-lodging firms. We then compared the difference between these two final figures to identify if the lodging stock was undervalued, overvalued or fairly valued compared to the non-lodging stock. The results are mixed in nature that yearly analyses show that the lodging stock is not consistently undervalued, but the pooled analysis shows that the lodging stock is undervalued. One major limitation is the small sample size of the lodging data. Therefore, collecting bigger sample size of the lodging firm may provide better insights on this issue.
Detecting Informed Trading around Hospitality Acquisition Announcements using the Market Microstructure Approach
(2005-01-01) Oak, Seonghee; Andrew, William
When managers perceive an under- or overvaluation prior to the announcement of a hospitality acquisition payment, they may personally buy or sell their firm’s shares. In addition to managers, other informed traders (e.g., value traders, technical traders, arbitrageurs) may undertake transactions through their personal accounts prior to announcing an acquisition payment. The results for informed trading show that a market maker tries to avoid losses inflicted by informed traders. For cash- or stock-financed acquisitions, the bid-ask spread does not change, but the ask or bid depth narrows significantly prior to the acquisition payment announcement. The specialists reduce the bid depth to keep an informed trader from selling in the case of a stock-financed acquisition. The specialists reduce the ask depth to keep an informed trader from buying in instances of cash- and mixed-financed acquisitions. While the bid-ask spreads do not reveal significant changes prior to the acquisition payment announcement, the depths narrow in the same period because the depth measures informed buying and selling separately as the ask and bid depths, but the spread includes both informed buying and selling together.
Emperical Investigation of the CAPM vs. Fama-French Model: Evidence From the Lodging Industry
(2005-01-01) Madanoglu, Melih; Olsen, Michael D.; Kwansa, Francis A.
Proper estimation of the cost of equity continues be a challenge for business executives in their capital investment decisions. This is evidenced by the heated scholarly debate in the last two decades over the issue of what model should be used in estimating cost of equity capital. The present study empirically investigates two of the main cost of equity models in their capacity to explain the variability in the lodging stock returns. The results reveal that Fama-French model consistently outperforms the Capital Asset Pricing Model in its explanatory power of cross-sectional lodging industry portfolio returns for the examination periods of 1993-2002 and 1998-2002. In addition, the Fama-French model provides a more realistic cost of equity estimate by adjusting for size and financial distress of the lodging portfolio.