Brand Affiliation And Hotel Asset Market

Abstract

Brand affiliation represents a signal about the future operating performance of a hotel that reduces information asymmetries between hotel buyers and sellers. However, information asymmetries vary across property-level and locational characteristics of hotels. We hypothesize that hotel brand affiliation as a signal is most valuable to investors when information asymmetries are higher due to hotel characteristics such as a lower-tier hotel class, suburban location, or poorer building condition. Using a sample of 23,323 hotel transactions from 1986 to 2021, we provide evidence that branded hotels with characteristics indicating higher information asymmetries achieve a higher transaction price and shorter marketing time than similar independent hotels. Transaction price and marketing time do not differ between branded and independent hotels with characteristics indicating lower information asymmetries.

Introduction

The information asymmetry theory postulates that parties to a transaction have different levels of information resulting in power imbalances and inefficiencies (e.g., Rothschild and Stiglitz, 1976; Spence, 1973; Akerlof, 1970). Information asymmetries represent a challenge to hotel investors as sellers have an informational advantage over buyers about operational, property-level, and locational characteristics of hotels that affect future cash flows for these assets. Compared to other property types, the absence of long-term leases in hotels makes information asymmetries between buyers and sellers even more pronounced. Signaling allows to reduce information asymmetries between transacting parties as it provides information to buyers about the quality of a product, service, or asset (signaling theory; Spence, 1973). Branding has been found to represent a valuable signal in the context of, amongst others, consumer goods, health care, investor relations, IPOs, and recruitment (Ozdemir et al., 2019, Agarwal et al., 2016, Mascarenhas et al., 2013, Karstens and Belz, 2006).

We argue that brand affiliation represents a signal to investors about the future cash flows of a hotel considering that it has been found to positively impact hotel operational performance (Wang and Chung, 2015, Tsai et al., 2015, O’Neill and Carlb?ck, 2011). Considering that hotel brand affiliation signals information about future operating performance, it is able to reduce information asymmetries between buyers and sellers. However, information asymmetries have been found to vary across property and location characteristics (Wong et al., 2012), and we expect brand affiliation as a signal to be most important for hotels with characteristics indicating higher information asymmetries such as hotel class, location and building condition.

In our empirical investigation, we assess the importance of brand affiliation as a signal about future operating performance for hotel investors using two measures: transaction prices and marketing time. If hotel brand is a valuable signal to investors for assets with higher information asymmetries, we expect them to be willing to pay a premium for branded hotels of a lower class, suburban location, or poorer building condition compared to similar independent hotels. Previous empirical studies on the relation between brand affiliation and transaction prices (Dick, 2019, Das et al., 2018, O’Neill and Xiao, 2006) yielded mixed results. O’Neill and Xiao (2006) find that hotel brand is an essential predictor of hotel transaction prices, but the effects vary across hotel segments and brands. Dick (2019) investigates determinants for hotel transaction prices across branded and independent hotels in the luxury and upper-upscale segments. The author finds that RevPAR significantly predicts asset prices while other metrics such as ADR and occupancy or geographic location do not. Das et al. (2018) show that most brands have an insignificant association with hotel asset prices. However, they still find instances where brands have a positive or negative association with hotel asset prices. One explanation for the ambiguous results of these previous studies, which we use as a starting point for our research, is that the importance of brand affiliation as a signal to investors varies across hotel characteristics implying different levels of information asymmetries.

Furthermore, branded hotels with location- and building- characteristics indicating higher information asymmetries are expected to have a shorter marketing time than similar independent hotels. Hereby, marketing time represents the duration in months, if not years, until a property is sold. Measured as time between the listing of a property and closing of the sale, marketing time represents a measure of liquidity risk (Cheng et al., 2008) and disequilibrium in real estate markets (Miller, 1978). It is affected by the desirability of an asset to investors, economic and real estate market conditions as well as other factors such as the time needed to conduct due diligence, contracting, and secure financing.

Section snippets

Information asymmetries between buyers and sellers

An important characteristic of markets is that the quality of products varies, which increases the uncertainty for buyers and creates an incentive for sellers to sell when product quality is poor (Lemons problem; Akerlof, 1970). Rothschild and Stiglitz (1976) argue that buyers in asset markets do not have complete information, and sellers know more about the respective asset they are selling than buyers, which leads to information asymmetries between the parties.

The hotel asset market is

Data and methodology

We obtained hotel transaction data from CoStar for all markets in the United States from January 1986 to April 2021. CoStar has detailed information on hotel transactions such as transaction date, transaction price, and marketing time (in days). We exclude all transactions that were reported as sales without transaction price as well as any transaction that is non-arm’s length, portfolio sales, distressed sales, partial sales, 1031 exchange, or has other detrimental conditions. We define our

Results

As a starting point, we estimate our model in Eq. 1 for each of the dependent variables (Transaction Price?or?Marketing Time)?for the full sample. As a robustness check, we estimate our model by also including?Transaction Price?as a control variable in the?Marketing Time?regression and?Marketing Time?in the?Transaction Price?regression. The results are reported in Table 2.

The coefficients on?Branded Hotel?are significant for all regressions and in the expected direction. In particular, branded

General discussion

Hotel asset markets are highly segmented, informationally inefficient, and heterogeneous (Ling et al., 2014, Clayton et al., 2009, Fisher et al., 2003), which results in information asymmetries between hotel buyers and sellers. Signaling allows to reduce information asymmetries between parties (signaling theory; Spence, 1973), and branding represents a signaling strategy (e.g., (Agarwal et al., 2016, Mascarenhas et al., 2013, Christodoulides, 2009, Karstens and Belz, 2006, Ward and Lee, 2000).