The implications of the COVID-19 pandemic are still unfolding, yet it is clear that economically no industry has felt the pain more than hospitality. In a forthcoming paper to be published in Research in International Business and Finance my Bloch colleagues (John Clark and Steve Pruitt) and I examine the financial impact of COVID-19 on the hospitality industry.
Using a global sample of publicly traded restaurants, hotels, and casinos we find that over $400 billion in market capitalization of hospitality firms evaporated between late February 2020 and the end of March 2020. To put into perspective just how much worse things were for hospitality, note that the S&P 500 index fell over 23% during the same period compared to a fall of over 40% for the firms in our sample.
Stating the Obvious
The hospitality industry was never built for lockdowns. It relies on discretionary income, travel, and face-to-face contact. An era characterized by declining personal income, travel restrictions, facemasks, social distancing, and fear of infection is an obviously poor situation for hospitality firms. In short, the results above are not surprising although the magnitude of loss is indeed staggering.
Our research interest was in explaining the differences in performance between various hospitality firms. While the entire industry suffered, who was best suited to perform relatively better than peers?
The results indicate that a strong balance sheet and income statement were key ingredients to (relative) success. In particular, firms with lower debt levels fared substantially better than those with high debt levels. Prudent financial management in all times involves ensuring enough cash to meet obligations. One way to minimize the risk of failure to pay is to minimize exposure to debt. Once a difficult economic time is upon a firm, pivoting to less debt can be challenging and the pandemic demonstrated some benefit to lower debt levels.
Within the industry groupings, hotels outperformed restaurants, which outperformed casinos. These findings are consistent with medical recommendations at the time concerning the relative safety of various activities.
Corporate Social Responsibility (Non) Results
Corporate Social Responsibility (CSR) has become a hot topic and is associated with a variety of potential firm benefits including lower risk. As a result, we compared financial performance based on the quality of CSR for hospitality firms. We did not find that CSR improved or hindered financial performance. It is worth noting that these results don’t suggest a lack of value in CSR, but rather demonstrate that in what was a potentially existential threat to the industry, CSR did not save firms from financial pain.
Finally, we examined country level characteristics. Our results showed that one dimension of national culture, individualism, was most related to hospitality industry financial performance. Nations with more individualistic cultures, the United States for example, had a harder time than firms in countries with more collectivist cultures. I would speculate that this result was due to market perceptions about how quickly various countries would return to normal.
All of our results were based off of the stock market reaction immediately following the start of lockdowns related to the pandemic. It was not clear in early 2020 exactly how the pandemic would unfold, yet we were able to utilize the market reaction to evaluate which firms were positioned to best weather the storm. The exact financial ramifications for the pandemic will not be known for some time, but our research methodology allowed for an early analysis that shed some light on a very uncertain situation.