2008
Abstract:
Hotel real estate industry is an important economy in the U.S. This study examines the
return patterns of hotel real estate stocks in the U.S. from 1990 to 2007. This study
utilizes an integrated framework which includes the most critical explanatory variables
to investigate the determinants of the contrarian or momentum profits of the hotel real
estate industry. The study finds that the magnitude and persistence of future returns of
hotel real estate stocks can be predicted based on past returns, past earning surprises,
trading volume, firm size, and holding period.
The evidence of this paper strongly confirms that short-horizon contrarian profits are
partially due to lead-lag effects, while in the intermediate-term price momentum profits
and long-term contrarian profits are partially due to the firms’ overreaction to past
price. My result tends to support the price overreaction hypothesis, and is clearly
inconsistent with the risk-based hypothesis and the underreaction hypothesis. The study
also confirms the earning underreaction hypothesis and finds the high volume stocks
tend to earn high momentum profits in the intermediate-term.
The study finds that the earning momentum effect for hotel stocks is more short-lived
in persistence and smaller in magnitude than for the whole market on average. Possible
explanation is that products and services of hotel industry are highly perishable. Near
term earnings information of hotel stocks could be more easily and precisely estimated
and therefore reflected into the prices than what could be done for other industries.
The key finding of this study is that price momentum portfolios (or contrarian
portfolios) of big hotel firms underperform that of small hotel firms and the hotel price
momentum portfolio (or contrarian portfolios) significantly underperform that of the
overall market over the intermediate-term (or the long-term). It implies the hotel
industry, particularly big hotel firms, have executed more conservative growth strategy
after the 1980s’ hotel oversupply and financial problem. It could be also possibly
caused by big hotel REITs which are less likely to overinvest compared with the
overall stock market. The study suggests that a conservative hotel growth strategy
accompanied by an internal-oriented financing policy is appropriate in a period of
prosperity.
