Brand affiliation and the hotel asset market

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 Carlbäck, 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.