Type of Submission

Refereed Article


In this paper, we use asset betas and equity betas over the period January 2000 through December 2015 to investigate the operating and financial risk of hotel industry REITs and C-Corps. We conclude that, on average over our sample period, the operating risk of C-Corps exceeds that of REITs. One interpretation of this result is that management contracts between REITs and C-Corps allocate more operating risk to C-Corps than to REITs. We also find that, on average, during our sample period, the equity betas of C-Corps exceed those of REITs. However, the difference between the average equity risk of the two sectors is much smaller than is the sectors’ difference in operating risk. Because equity betas capture both operating and financial risk, these results imply that REITs have significantly less operating risk than C-Corps and offset their lower business risk with higher financial leverage. During the global financial crisis, operating risk increases in both hotel industry subsectors, and the amount by which C-Corp asset betas exceed REIT asset betas is roughly proportionate to that observed in noncrisis periods. During the financial crisis, however, REITs experienced a greater increase in finan- cial leverage than did C-Corps, with the result being that the normal relation reverses, i.e., during the global financial crisis, REIT average equity betas significantly exceeded the average equity betas of C-Corps.