Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
METHODOLOGY AND DATA 
Methodology 
The five proposed hypotheses are tested with the following simultaneous equations model. The 
simultaneous equations model is employed because this study is to test the simultaneous relationships between 
internationalization, leverage, and profitability. Moreover, as discussed in the literature review, internationalization 
and capital structure could be interrelated and moderate each other’s influence on firm performance. Therefore, a 
simultaneous equations model consisted of the following three equations for the purpose of this study. 
Equation 1: 
1
1
2
2
1
0
ε
α
α
α
+
Α
+
+
+
=
Z
LEV
LEV
INTL
Equation 2: 
2
2
2
2
1
0
ε
β
β
β
+
Β
+
+
+
=
Z
INTL
INTL
LEV
Equation 3: 
3
3
3
5
2
4
3
2
2
1
0
*
ε
γ
γ
γ
γ
γ
γ
+
Γ
+
+
+
+
+
+
=
Z
LEV
INTL
LEV
LEV
INTL
INTL
ROA
, where INTL: level of internationalization; LEV: leverage; ROA: profitability of international hotels measured by 
Return on Assets; Z
1
, Z
2
, and Z
3
are vectors of controlling variables of equation 1, 2, and 3 respectively; A, B, and 
Γ
are coefficient vectors for Z
1
, Z
2
, and Z
3
respectively; 
ε
1
, 
ε
2
, and 
ε
3
are error terms for equation 1, 2, and 3 
respectively. 
Markides and Williamson (1994) treated their system of equations as recursive rather than endogenous because they 
believe that feedbacks in the system occur at sufficiently long lags to allow them to pull out individual equations for 
separate treatment. In this study, because a firm’s leverage and internationalization are intertwined, the accurate 
impact of internationalization can not be presented without accounting for such interlinks. Econometrically, the 
remedy for such problem is to use the Seemingly Unrelated Regressions (SUR) procedure, which addresses the 
existence of contemporaneous correlation between equations (Singh & Nejadmalayeri, 2004). However, the possible 
reciprocal relationship between internationalization and capital structure decisions also means that endogeneity 
could exist in the system. Moreover, the inclusion of internationalization and leverage as regressors in the 
profitability equation (eq. 3) would cause endogeneity problem. The endogeneity will be checked by the Hausman 
test on all pairwise combinations of three dependent variables: internationalization, leverage, and profitability. If the 
null hypothesis of none endogeneity is rejected, the Three-Stage Least Squares (3SLS) procedure, instead of the 
SUR, will be used to account for the possible endogeneity. The 3SLS procedure takes into account the information 
present both within and across the proposed equations (Davidson & MacKinnon, 2004). The detail procedures of 
testing hypotheses using the results of 3SLS are outlined as follows: Hypothesis 1 and 2, (
Internationalization and 

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