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The Relationship between Stock Returns and Past Performance of Hotel Real Estate Industry in the US: Is Hotel Real Estate prone to overinvestment

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  • Minye Zhang
  • Yongheng Deng

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.

Suggested Citation

  • Minye Zhang & Yongheng Deng, 2008. "The Relationship between Stock Returns and Past Performance of Hotel Real Estate Industry in the US: Is Hotel Real Estate prone to overinvestment," Working Paper 8529, USC Lusk Center for Real Estate.
    • Handle: RePEc:luk:wpaper:8529
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    References listed on IDEAS

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    3. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, vol. 54(4), pages 1249-1290, August.
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