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

 
RESULTS 
Contrary to the hypothesis that internationalization could reduce earnings volatility, international hotels 
have shown significantly higher earnings volatility (Table 2). Meanwhile, international hotels maintain a lower 
leverage, which might be a result of the reduced debt capacity due to high earnings volatility. The extra volatility in 
international hotels’ earnings may come from the exposure to foreign exchange rate and political risks (Burgman, 
1996; Singh & Nejadmalayeri, 2004). The emerging markets that hotels have been ardently pursuing in recently 
years especially bear more currency and political risks than more stable U.S. home market. As a response to the 
increased foreign exchange risk, internationally diversified firms usually arrange loans in local currencies to hedge 
the fluctuation of the exchange rate (Singh & Nejadmalayeri, 2004). 
International hotels also exhibited significantly lower fixed assets and higher intangible assets than 
domestic hotels. This could be the result of hotel’s increasing usage of franchises, management contracts, and 
strategic alliances. With these expansion strategies, hotels do not need to invest own capital in the fixed assets. On 
the contrary, the hotel would have more incentives to invest in intangible assets such as brand equity, operation 
expertise, or reservation system. Because intangible assets (such as brand equity, operational expertise, and 
distribution channel) are usually firm specific assets that have low liquidity and redeployable value, debt holders 
would bear higher risk and cost to invest in highly internationalized hotels. Therefore, as the level of intangible 
assets increases with the level of internationalization, the debt capacity would decrease. Interestingly, international 
hotels were found to be not different from domestic hotels in terms of profitability. In the risk-return framework, 
such result implies that the overall risk of international and domestic hotels is not different. Therefore, it can be 
inferred that the extra risk associated increased earnings volatility is offset by the risk reduced from lower leverage. 
In other words, hotels would balance the risk from business (earnings volatility) and financial activities (financial 
leverage) to control the overall risk.