Research Recap: Uncovering the attributes of sustainable earnings in the lodging industry
“Determinants of Earnings Persistence and Predictability for Lodging Properties”
New research from the School of Hotel Administration (SHA) shows that while earnings are used in the lodging industry to inform key financial decisions, from setting incentives for management contracts to determining capital allocations, little is known about the factors that can have a significant impact on achieving sustainable earnings in the industry.
The study identifies several factors that affect the two key components of earnings in the lodging industry: their persistence (the ability of earnings to recur) and their predictability (the ability to forecast earnings).
Published in Cornell Hospitality Quarterly, the paper identifies several property-level factors that can increase earnings persistence and predictability in the lodging industry including barriers to entry. Specific factors can be captured through a measure of differentiation and defined by the relative amount of marketing expenditures and the stability of earnings. The earnings can then be measured in two ways, namely, size and diversification.
One attribute that can negatively impact the sustainability of earnings in the lodging industry is resource rigidity or an inflexible hotel operating cost structure. Resource rigidity refers to the inability to adjust resources in response to changes in the business climate. Resource rigidity was captured in two ways through operating leverage and labor intensity where labor intensity is a proxy for the short-run inflexibility of labor costs.
The study, based on an analysis of data from 2,444 hotel properties from 1997 to 2015, also found little relationship between a lodging property’s earning attributes and its size or classification as a conference center.
Major results:
- The two key components of sustainable earnings are persistence (the ability of earnings to recur) and predictability (the ability to forecast earnings).
- Factors that can increase earnings persistence and predictability in the lodging industry are barriers to entry, captured through a measure of differentiation and defined by the relative amount of marketing expenditures, and the stability of earnings, measured in two ways, namely, size and diversification.
- Resource rigidity, as measured by operating advantage and labor intensity, had a consistent dampening impact on earnings persistence and predictability.
Disciplines represented:
Hospitality management, corporate finance, accounting
Contributing school:
- School of Hotel Administration at Cornell University
Co-authors:
- Linda Canina, professor of finance, academic director of the Center for Hospitality Research, and academic co-director of the Pillsbury Institute for Hospitality Entrepreneurship, School of Hotel Administration, Cornell University
- Gordon Potter, associate professor emeritus of accounting, School of Hotel Administration, Cornell University
Publication information:
“Determinants of Earnings Persistence and Predictability for Lodging Properties,” was published in Cornell Hospitality Quarterly, Volume 60, Issue 1, in 2019.