Precursors to the financial and strategic orientation of hotel property capital budgeting

Journal of Hospitality and Tourism Management 33 (2017) 31e42

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Precursors to the financial and strategic orientation of hotel property capital budgeting Michael J. Turner The University of Queensland, UQ Business School, Brisbane, QLD 4072, Australia

a r t i c l e i n f o

a b s t r a c t

Article history: Received 26 February 2017 Received in revised form 11 June 2017 Accepted 12 September 2017

The purpose of this study is to develop and test a set of hypotheses concerned with exploring for precursors to the degree of emphasis hotel property General Managers attach to a financial versus strategic orientation in capital budgeting. Results are based on 200 survey responses from the General Managers of Australian and New Zealand hotels. The findings indicate that capital budgeting is more financially orientated than strategically oriented in hotel properties that adopt a management contract and also where the owner gets more involved in the capital budgeting process. No support is found for the hypothesised role of ego-trip hotel ownership, the age of a hotel property, a General Manager's number of years of experience, or public versus private hotel ownership. As an over-reliance on financial capital budgeting information can bias decision-makers against longer-term investment projects, it is conjectured that hotel capital budgeting may be somewhat sub-optimal in those hotels that adopt a management contract and which have a greater level of hotel owner involvement in the capital budgeting process. © 2017 The Authors.

Keywords: Capital budgeting Capital investment Management contract Hotel owner Strategic orientation Nonfinancial measures

1. Introduction The study of hotel capital budgeting is of unrelenting importance because the growth and maintenance of property values as well as higher levels of guest satisfaction and occupancy are contingent upon these investment decisions (Harper & Fiacchi, 1996). Despite extensive surveys of capital budgeting practice and use (e.g. Gitman & Vandenberg, 2000; Graham & Harvey, 2001; Ryan & Ryan, 2002), a limiting characteristic is that they have focused almost exclusively on financial measures (Ittner & Larcker, 2001). However, strategic measures are often used to assist in capital budgeting decision making (Moyer, McGuingan, & Kretlow, 2001) and a successful capital budgeting project does not necessarily have to be justifiable on purely financial grounds (Liberatore, Monahan, & Stout, 1992). In fact, there is evidence to suggest that use of financial capital budgeting measures alone can lead to the adoption of uneconomically viable projects (Cheng, Schulz, Luckett, & Booth, 2003). In an effort to advance our appreciation of the relative emphasis hotel General Managers (GMs) attach to financial

E-mail address: [email protected]. http://dx.doi.org/10.1016/j.jhtm.2017.09.004 1447-6770/© 2017 The Authors.

versus strategic measures in capital budgeting, this study has pursued the objective of investigating for precursors to the degree of emphasis GMs attach to a financial versus strategic orientation in hotel property capital budgeting. Motivation for this research comes from several sources. Firstly, Chen (2008) found that high product standardisation is associated with a greater financial orientation in capital budgeting decision making. Focusing on a specific industry represents an attempt to control for cross-industry variation in factors such as product standardisation. Secondly, the study of hotel capital budgeting is of major importance to hotels as they are punctuated by having a very high capital intensity (Collier & Gregory, 1995). Annual capital expenditures in U.S. hotels, for example, are reported to be 9.7% of gross revenue (ISHC, 2015, pp. 1e243). This demonstrates that capital budgeting decisions are likely to have a significant and long-lasting impact on a hotel property's direction, growth and ultimate performance. Thirdly, capital budgeting decision making tends to transpire within a context where the agency model is central (see Haka, 2007). This could be important because hotel owners are increasingly contracting hotel management companies to operate their properties (deRoos, 2010) in order, among other reasons, to generate higher profitability (Aissa & Goaied, 2016). Guilding (2003, p. 180) notes with regard to management

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contracting that this “schism between ownership and management signifies that unlike the context of most capital budgeting, where investment decisions are made within the confines of a single hierarchical organisation, two distinct organisations are frequently involved in hotel investment decision making processes”. As GMs are typically responsible for the preparation of capital budgeting proposals (Denton, 1998) it is therefore the case than an added layer of complexity exists in hotels operating with a management contract. The GM, for example, acts as an agent to two principals, their owner and their management company meaning that there are potential agency problems at two distinct levels of the relationship e between the two principals and between each of them and their mutual agent, the GM (Hodari, Turner, & Sturman, 2017). Whichever of the generally accepted main hotel operational forms are in operation, for example, the independent owneroperator, franchise or management contract (Gannon & Johnson, 1997), it can be particularly challenging for principals to limit the agency problem so they often turn to behavior-based control systems (Eisenhardt, 1989). This usually includes intervening in and therefore monitoring their agents' activities (Bergen, Dutta, & Walker, 1992) so as to mitigate their agents' information advantage and the potential for goal conflict. Involving themselves in the capital budgeting process is a way for principals to monitor and influence (Anderson & Oliver, 1987) their agent. This in turn can reduce the agent's propensity and/or ability to act counter to the owner's interests (Stump & Heide, 1996). The main findings of this current study are that (1) management contract adoption, and (2) greater hotel owner involvement in the capital budgeting process each have a significant positive affect on the financial orientation of hotel property capital budgeting. No support is provided for the impact of ego-trip ownership, age of hotel property, experience of the GM, or public versus private hotel ownership on the financial versus strategic orientation of capital budgeting. These findings are illuminating if it is recognised that an over-reliance on financial capital budgeting information can bias decision-makers against certain investment projects (Ashford, Dyson, & Hodges, 1988; Cheung, 1993; Phelan, 1997). Specifically, they tend to accept too many short-lived projects and reject too many long-lived projects (Butler, Davis, Pike, & Sharp, 1991). This is one of the primary reasons why an approach to capital budgeting that incorporates both financial and strategic components is advocated (Gumbus, Lyons, & Bellhouse, 2003; Milis & Mercken, 2004). For example, it can encourage a relatively more balanced approach between the pursuit of long-term strategic objectives and shorter-term actions (Kaplan & Norton, 1996). In the long-run this shorter-term focus could act as a significant impediment in terms of its effect on such hotel property's growth, development, and ultimate performance. The remainder of this paper is organised as follows. The next section outlines the literature which is pertinent to the development of this study's hypotheses. After this, the research method is presented, which is followed by measurement of the study's key variables. Next the study's results are documented, which are followed by a discussion of the findings. The final section provides a concluding commentary that includes implications, limitations and avenues for future research. 2. Literature review and hypothesis development Porwal and Singhvi (1978), Kamath and Oberst (1992), and Chen (2008) have undertaken survey based enquiries relating to the issue of a financial versus nonfinancial approach to capital budgeting appraisal. While a large volume of research findings

signify that one can be confident that the application of discounted cash flow capital budgeting techniques relative to other financially oriented techniques such as payback and accounting rate of return has increased substantially in the last 50 years (Haka, 2007), we actually know very little about whether the emphasis attached to financially oriented capital budgeting methods relative to other nonfinancial methods of capital budgeting has changed over the same time period. Furthermore, while a large body of capital budgeting literature exists that has focused on which appraisal techniques are being used (e.g. Arnold & Hatzopoulos, 2000), much less attention has been given to how these techniques are being used (Alkaraan & Northcott, 2007) and how they might vary across different contextual settings (Haka, 1987; Slagmulder, Bruggeman, & Van Wassenhove, 1995; Verbeeten, 2006). Given the calls for nonfinancial measures to be integrated into management accounting systems (Kaplan & Norton, 1992; Vaivio, 1999), this appears as surprising. Indeed it is notable that many empirical studies conclude that the application of financially oriented capital budgeting appraisal techniques do not always translate into better firm performance (see Haka, 2007). A further limitation that arises in the extant literature relates to the fact that the degree of emphasis managers place on financial versus nonfinancial measures in capital budgeting has previously considered only the impact of national context (e.g. Carr & Harris, 2004; Carr & Tomkins, 1996, 1998; Shields, Chow, Kato, & Nakagawa, 1991). Studies which have documented differences in companies' emphasis on financial measures within same-country contexts suggest that these differences may be associated with other contextual variables, but there is little discussion of what these might be (e.g. Alkaraan & Northcott, 2006; Butler et al., 1991; Sandahl & Sjogren, 2003). Very little research has provided evidence regarding which contextual variables, other than country context, might be associated with these differences (Chen, 2008; Verbeeten, 2006). This current study seeks to address these limitations. 2.1. Management contract adoption A management contract is a written agreement between an owner and operator where the operator is appointed to operate and manage a hotel in the name of, on behalf of, and for the account of the hotel owner (Schlup, 2004). The contract includes a description of the operator's remuneration fee determination (Turner & Guilding, 2010b). Although there is no single standardised management contract (Johnson, 1999), the typical arrangement enables a hotel owner to retain legal ownership of the hotel site, building, plant and equipment, furnishings and inventories, while the operator assumes responsibility for managing the hotel's day-today business (Guilding, 2003). Drawing on the principles of agency theory, Guilding (2003) claims that management contract operated hotels will adopt more formalised capital budgeting procedures than hotels without a management contract because: (1) the propensity for capital budgeting information asymmetry arising between hotel owner and operator can be expected to cause hotel owners to implement relatively formalised procedures as part of a strategy designed to combat this challenge and also manage a potential for goal incongruence; and (2) the incremental dynamic arising in a management contract hotel structure will likely give rise to greater capital budgeting formalisation due to the need of the two parties to project themselves to one another in a formalised manner (prediction based on Brunsson, 1989; Langley, 1990, 1991). A capital budgeting process can be viewed as “formalised” where there is high “systematic study of issues” (Langley, 1990, p. 17), as

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well as importance attached to formal analysis using financial capital budgeting appraisal methods such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback or Return On Investment (ROI) (Van Cauwenbergh, Durinck, Martens, Laveren, & Bogaert, 1996). Hotels operating with a management contract are therefore expected to have a higher financial orientation in their capital budgeting appraisal measures than hotels without a management contract. H1. Management contract adoption positively affects the degree of financial orientation in hotel property capital budgeting.

2.2. Hotel owner involvement in the capital budgeting process Turner and Guilding (2010a) note that hotel management tends to provide the lead with respect to initiating hotel capital budgeting proposals. However, as the party with the proprietary stake in any asset purchased, it is the owner that provides final approval for all capital expenditures. Greater owner involvement in the capital budgeting process can therefore be expected to place the owner in a stronger position to monitor and hence to lessen information asymmetry (Antle, Bogetoft, & Stark, 1999). Where ownership adopts a “hands on” approach in capital budgeting decision making, evidence suggests that the appraisal process will be more informal with simpler techniques being adopted, even to the point where appraisal is based mainly on “feel” (Collier & Gregory, 1995, p. 52). An owner's greater involvement in a hotel's capital budgeting appraisal process would therefore signify that they have a reduced need for the financial insights provided by hotel management, as their involvement would mean that they are already securing greater insights relative to less involved owners. This reduced need for ‘second hand’ financial insights can be expected to result in an involved owner reducing the relative emphasis attached to financially based capital budgeting appraisal measures (Marino & Matsusaka, 2005). Drawing further on Brunsson (1989) and Langley's (1990, 1991) perspective that organisations implement formalised procedures for symbolic reasons, there would appear to be less reason for symbolic posturing when an owner is more engaged in a hotel's operations. This is because the owner's greater involvement in a hotel's day-to-day affairs would give rise to a closer working relationship with the hotel's GM. In such a situation, hotel management's perceived need to adopt a formalised posture in capital budgeting would be greatly mitigated. In light of this rationale, it is expected that as hotel owners become more involved in the capital budgeting process, a less financially oriented approach to capital budgeting will prevail. H2. Owner involvement in the capital budgeting process negatively affects the degree of financial orientation in hotel property capital budgeting.

2.3. Ego-trip ownership In many cases, motivation for hotel ownership can be strongly linked to a pride factor (Antel, 2006; Canina, 2001). Beaver and Jennings (2005, p. 20) see such hotel owners as using their property as a “vehicle for satisfying personal ambitions”. Guilding (2006, p. 415) uses the term “ego-trip oriented ownership” to reflect this type of hotel ownership. Closely related to ego-trip ownership, Allison (2004, p. 56) refers to “trophy buyers”. The underlying objective of an ego owner is to gratify their desires, indulge in their emotions and satisfy their wishes (Locke &

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Woiceshyn, 1995). Ego owners can spend copious amounts of time engaged in designing the look and feel of their hotel to suit personal preferences (Baltin & Cole, 1995; Wagner, 1998). For this type of owner, the emotive aspect can often override financial criteria in capital budgeting appraisal. Antel (2006, p. 213) provides the following commentary on ego owners: Owning hotels is often an ‘ego business’ (perhaps akin to owning a football club?), where an owner who has successfully developed a business empire in another sphere, through hard work and sound business judgement, suddenly chucks commercial reason out the window on the hotel project. Hence, it is expected that where there is high ego-trip ownership, the emotive nature of such owners would lead to a lower emphasis on financial measures when justifying capital budgeting projects. H3. Ego-trip ownership negatively affects the degree of financial orientation in hotel property capital budgeting.

2.4. Age of hotel property The owners of hotel properties reaching twenty-five years of age face unique difficulties in capital budgeting because it is at this point that they usually have to decide whether to sell or redevelop the property so as to overcome both internal and external deterioration of the product (Younes & Kett, 2007). Davis and DeRoos (2004) explain that if a hotel's owner does decide to carry out the required capital works at this time, then this decision would typically be taken if they believe that they can carry out the required renovations, repositioning and/or change in use of the property more cheaply than an incoming owner. As a result, the preparation of capital budgets within hotels reaching an older age is arguably of heightened importance so as to avoid an existing owner passing on a potentially good deal to a new buyer. Owners with shorter-term investment holding periods, however, such as five years or less, are typically characterised by a market timing strategy of ‘buy low and sell high’, which may not take into consideration capital spending to the same degree as a longerterm oriented hotel owner (Davis & DeRoos, 2004). For these shorter-term oriented owners, the capital budgeting decision becomes more tactical than strategic (Davis & DeRoos, 2004). Based on this rationale, capital budgeting is expected to be less financially orientated in older hotel properties. H4. Age of hotel property negatively affects the degree of financial orientation in hotel property capital budgeting.

2.5. Experience of the hotel property General Manager Beginning in the 1980s, the formal training of GMs in the hotel industry was stepped-up in order to enhance, among other things, their skills in the capital budgeting appraisal process (Ashton, 1985). Over a ten year period from 1980 to 1990, Burgess (1995) found that the percentage of U.K. senior hotel personnel involved in making capital budgeting decisions rose from around 47% in 1980 to almost 62% in 1990. Damitio (1988) highlighted the way in which as hotel GMs acquired more experience, they tended to perceive capital budgeting as more important. However, some hotel owners have expressed concern that their GMs are deficient in terms of skills in cost estimation, meaning that the preparation of capital budgeting proposals often can be considered to extend beyond their skill set (Beals & Denton, 2004; Crandell, 2002;

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Denton & Yiankes, 2004). The hotel industry, however, has seen rapid change, which one could argue has led GMs to acquire greater financial knowledge (Scapens & Jayazeri, 2003; Smith, Morris, & Ezzamel, 2005). While many GMs do require more modern business skills, and that there has been a large increase in the automation of accounting processes along with rapid developments in technology and added pressures from shareholders to achieve optimal results on investments, it is argued that GMs' skills in capital budgeting will develop as they acquire more experience. Hence, it is expected that greater GM experience will be associated with a more financially orientated capital budgeting appraisal. H5. Experience of the hotel property General Manager positively affects the degree of financial orientation in hotel property capital budgeting.

2.6. Public versus private hotel ownership A large proportion of owners of publicly traded hotel companies are institutional in nature (Turner & Guilding, 2014), a factor that might reasonably be expected to promote a culture of more formalised and financially oriented capital budgeting decision making. Institutional owners also differ from individual or private owners because they are typically better informed and better placed to effectively monitor the performance of their managers (Oak & Dalbor, 2008). In publicly traded firms sophisticated capital budgeting appraisal techniques tend to dominate (Pike, 1985). On the other hand, private unlisted firms tend to make relatively low use of sophisticated capital budgeting appraisal techniques (Holmes & Nicholls, 1988). A potential reason for this is that justification for the discount rates used in sophisticated capital budgeting appraisal techniques are based on the separation principle, which relates to where capital budgeting decisions can be made independent of shareholders' preferences, and this does not always hold for closely-held smaller private firms (McInish & Kudla, 1981). Based on this rationale, it is expected that capital budgeting appraisal will be more financially orientated where hotel ownership is public. H6. Public hotel ownership positively affects the degree of financial orientation in hotel property capital budgeting.

3. Method Data for this current study was collected in four ways. Firstly, a total of 463 Australian and 201 New Zealand hotel properties were mailed a questionnaire addressed to their GM. The Royal Automobile Club of Queensland (RACQ) Hotel Accommodation Guide provided the sampling frame for Australian hotels, while the sampling frame for the New Zealand (NZ) sample was drawn from cross checking against two comprehensive online databases, which included ‘wotif.com’ and ‘asiahotels.com’. The population of all Australian and NZ hotels appearing in these directories with twenty rooms or more and a star-rating of three or more were included in the sample. Hotels not meeting these criteria were excluded as it was felt that such hotels would lack the facilities required to provide for complexity in dealing with capital budgeting. As the Australian and NZ directories provided information regarding hotel star-rating, a comparison of the sample data with the population data based upon hotel star-rating was carried out. The mean star-rating of the entire sample (mean 4.17, std. dev. 0.57, n ¼ 195) was significantly higher (p < 0.01) than the mean star-rating of the population (mean 4.04, std. dev. 0.59, N ¼ 664). The mean star-rating of the Australian sample (mean 4.28, std. dev.

0.46, n ¼ 144) was also significantly higher (p < 0.01) than the mean star-rating of the Australian population (mean 4.10, std. dev. 0.56, N ¼ 463). On the other hand, the mean star-rating of the NZ sample (mean 3.88, std. dev. 0.71, n ¼ 51) was not significantly different (p ¼ 0.770) to the mean star rating of the NZ population (3.91, std. dev. 0.64, N ¼ 201). While it is not expected that these differences pose any strong threat to the validity of this current study's findings, they should nevertheless be borne in mind because the Australian sample could be considered of a somewhat higher quality (i.e. star-rating) than the population it was drawn from. Three weeks after the initial mailing a follow-up mail was sent out to the sampling frame. Secondly, a number of representatives of hotel owners were contacted to distribute the questionnaire. Thirdly, after the first two phases, the respondents were contacted by email and encouraged to complete the questionnaire which was provided as an attachment. Finally, two weeks after the emailing approach a number of random telephone calls were made to GMs to encourage participation in the study. The survey response pattern is reported in Table 1, which shows that a total of 200 usable responses were gathered; representing a 32.21% response rate. Data screening procedures were undertaken prior to the statistical analyses. Minimal error was detected and rectified in terms of data input accuracy and out-of-range values. In order to test for the presence of univariate outliers standardised z-scores were computed (Tabachnick & Fidell, 2007). While a minimal number of outliers were detected, it was determined that the outliers had not resulted from incorrect data entry and they were not viewed as falling into a population that was not intended to be sampled. As a result, the outliers were retained (Tabachnick & Fidell, 2007). In terms of missing data, the only variable with more than 5% missing data was the control variable ‘Hotel owner size’. While methods used to handle missing values are wide ranging, the approach taken in this current study has been to run the analysis with the missing cases and to then run an additional analysis using an Estimation Maximisation (EM) dataset where the missing data is replaced to ensure that the result is similar (Hair, Black, Babin, & Anderson, 2010). A footnote is provided in the subsequent section which indicates this to be the case. Two dimensions of normality were assessed, skewness and kurtosis. In line with the recommendations of Tabachnick and Fidell (2007) and Coakes and Steed (2006), normality of the distribution of variables was assessed using both statistical (Kolmogorov-Smirnov and the Shapiro-Wilk measure) and graphical techniques. All variables were normally distributed with the exception of the two control variables ‘Hotel owner size’ and ‘Hotel size’. As the skewness and kurtosis for these two variables was unacceptable the natural logarithm is used in the subsequent statistical analysis (Hair et al., 2010). Non-response bias was assessed through investigation of profile

Table 1 Summary of survey replies. Country

First mailing Second mailing Industry distribution Email distribution Telephone Total number of responses Total number in sample Total response rate

Australia (n)

New Zealand (n)

Total (n)

55 36 41 10 3 145 437 33.18%

28 11 10 6 0 55 184 29.89%

83 47 51 16 3 200 621 32.21%

M.J. Turner / Journal of Hospitality and Tourism Management 33 (2017) 31e42

differences between each of the data collection approaches. The statistical analyses highlighted minimal differences, which suggest that this issue does not pose any strong threat to the validity of the study's findings. 4. Variable measurement This section outlines the independent, dependent, and control variables that will be used to formally the study's hypotheses through a multiple regression analysis. The independent variables include: ownership/management structure for the measurement of management contract adoption, hotel owner involvement in the capital budgeting process, ego-trip ownership, age of hotel property, experience of the GM, and public versus private hotel ownership. The dependent variable is the degree of financial versus strategic orientation in capital budgeting appraisal. Variables controlled for are the size of the hotel owner and hotel size. 4.1. Ownership/management structure The generally accepted main hotel operational forms are: the independent owner-operator, franchise, and management contract (Gannon & Johnson, 1997). The questionnaire asked respondents to indicate which of these three best described their hotel's operating structure. An “other” option, together with a description request, was also provided to respondents. 37.0% of respondents indicated “owner-operator”, 9.0% indicated “franchise”, 50.5% indicated “management contract”, and 3.5% indicated “other”. All of the “other” responses indicated that a lease was being used. For the subsequent statistical analyses, responses have been categorised as being either with a management contract (50.5%; n ¼ 101) or without a management contract (49.5%; n ¼ 99). 4.2. Hotel owner involvement in the capital budgeting process In the context of annualised budgeting Milani's (1975) six item budgetary participation questionnaire instrument measures the amount of influence an individual has on the budget as well as their level of involvement in the process of establishing the budget. In this current study four of the six items used in Milani's (1975) measure of the degree of influence and involvement in budgeting

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were drawn upon to develop a measure of hotel owner involvement in the capital budgeting process. Table 2 provides an overview of the four items developed, together with descriptive statistics, and the 7-point Likert scales used, where a score of seven indicates a high degree of owner involvement. For the four items, a correlation matrix revealed statistically significant associations (minimum of p < 0.05), the Kaiser Meyer Olkin was found to be 0.725 and Bartlett's Test was significant (p < 0.001). A factor analysis, revealed all of the items as having a communality greater than 0.5, with the exception of the second item “How often does your hotel owner initiate capital budgeting proposals without being asked?”, that yielded a communality of 0.345. This prompted the abandonment of the second item from subsequent analysis. Using the remaining three items, a one factor solution was obtained, which explained 57.35% of the variance, suggesting high convergence between the three measures. As a result, hotel owner involvement in the capital budgeting process has been measured by calculating the mean of the three items. These three items yield an acceptable Cronbach Alpha of 0.767. This consolidated measure yielded a mean of 5.52 and a standard deviation of 1.30 (n ¼ 198).

4.3. Ego-trip ownership An extensive literature search found questionnaire based research that had sought to measure ego within the hotel industry limited to that of Upchurch (1998a, 1998b). Upchurch's questionnaires, however, sought to determine the “ethical egoism” of GMs, which is primarily concerned with the ethicalness (i.e. self-interest) of decisions made by them (Upchurch, 1998a, p. 1349). However, in this current study it is the hotel owner's ego that needs to be measured meaning that the measures developed by Upchurch (1998a, 1998b) required adaptation. Based on the work of Upchurch (1998a, 1998b) a new measure has been developed by also drawing on descriptions of the phenomenon provided in the literature. The following two statements have been used to elicit the degree to which ownership of a hotel can be characterised as constituting an ego-trip for the owner: 1. “The owner of my hotel derives considerable pride from the hotel's appearance”; and 2. “Ownership of my hotel appears to provide an ego-trip for the owner”.

Table 2 Derivation and descriptive statistics for 4 items used to measure “Hotel owner involvement in the capital budgeting process”. Mean & (standard deviation)

Milani's (1975) six budgetary participation measurement items

Current study's measurement items

Likert scale

The portion of the budget the subordinate was involved in setting? The frequency of budget-related discussions initiated by the subordinate?

To what extent is your hotel owner involved in the hotel's capital budgeting process? How often does your hotel owner initiate capital budgeting proposals without being asked? How much influence do you feel your hotel owner has on the final approved capital budget in your hotel? How do you view your hotel owner's contribution to the capital budgeting process? e

1 7 1 7

1 ¼ No influence 7 ¼ A great deal of influence

5.91 (1.36) n ¼ 199

1 ¼ Not substantial 7 ¼ Very substantial e

5.20 (1.61) n ¼ 198 e

e

e

e

The amount of influence the subordinate felt he had on the final budget? The importance of the subordinate's contribution to the budget? The frequency of budget-related discussions initiated by the subordinate's superior when budgets are being set? The kind of reasoning provided to the subordinate by a superior when the budget is revised?

¼ ¼ ¼ ¼

Not at all To a large extent Never Very often

5.47 (1.71) n ¼ 199 3.59 (1.98) n ¼ 199

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Respondents were asked to indicate the extent to which they agreed with the two statements on a seven point Likert scale where 1 represented “strongly disagree” and 7 represented “strongly agree”. A correlation analysis of the two items revealed a statistically significant positive association (p < 0.05). As a result, it was determined that ego-trip ownership would be measured by calculating the mean of these two items. The mean of this consolidated measure was 3.93 with a standard deviation of 1.18 (n ¼ 197). 4.4. Age of hotel property Age of hotel property was assessed by asking respondents “Approximately how many years old is your hotel?” Responses ranged between 0.2 years and 128 years, with a mean of 23.17 years and a standard deviation of 23.50 years (n ¼ 195). 4.5. Experience of the GM Experience of the hotel GM was assessed by asking respondents “Approximately how many years have you been a hotel-property GM?” Responses ranged between 0.1 years and 26 years, with a mean of 3.91 and a standard deviation of 4.16 years (n ¼ 193). 4.6. Public versus private hotel ownership Public versus private hotel ownership was assessed by asking respondents the question “Which of the following best describes the nature of your hotel owner's entity?” Two response options were offered: “Public (Shares traded on stock exchange)”; or “Private (No shares publicly traded)”. Publicly owned accounted for 29.1% (n ¼ 57) of the responses while 69.5% (n ¼ 139) were privately owned.

From these perspectives, measurement of the financial versus strategic orientation in capital budgeting appraisal construct consisted of a total of six questions; three questions each for the financial orientation and another three for the strategic orientation of capital budgeting respectively. Table 3 provides an overview of these six items including an identifying code, means and standard deviations. Each of the questions were adapted from Butler et al. (1993). For these questionnaire items a seven-point Likert-type scale with 1 representing “not at all” and 7 representing “to a large extent” was used. Justified on the basis of the two thematic origins of the six questions a factor analysis was undertaken. The Kaiser Meyer Olkin was found to be 0.722 and Bartlett's test was significant (p < 0.001). As shown in Table 4 this analysis generated two factors with Eigenvalues greater than 1 (2.645, and 1.163), financial and strategic. Accordingly, the three items associated with a financial capital budgeting appraisal orientation have been consolidated by computing the mean of items F1, F2 and F3. These three items yielded a strong Cronbach Alpha reliability statistic of 0.750. The mean of this consolidated measure was 5.95 with a standard deviation of 0.84. The three items associated with strategic capital budgeting appraisal emphasis were consolidated by computing the mean of items S1, S2 and S3. These three variables yielded an acceptable Cronbach Alpha of 0.607. The mean of this consolidated measure was 4.98 with a standard deviation of 1.03. As the objective of this current study is to investigate the degree of financial versus strategic capital budgeting emphasis, a relative measure has been computed by deducting the strategic capital budgeting appraisal emphasis indicator from the financial emphasis measure. This yielded a mean of 0.97 with a standard deviation of 1.03 (n ¼ 196), suggesting that hotel capital budgeting appraisal is more financially oriented than strategically oriented. 4.8. Hotel owner size

4.7. Degree of financial versus strategic orientation in capital budgeting The relative degree of emphasis attached to a financial versus strategic orientation in capital budgeting is this current study's dependent variable. Measures for a financial orientation were drawn from the large volume of research which has been directed toward the application of financially focused techniques (e.g. Kester et al., 1999; Lamminmaki, Guilding, & Pike, 1996; Pike, 1996). However, there are only a small number of studies (e.g. Chen, 2008; Kamath & Oberst, 1992; Porwal & Singhvi, 1978) that have investigated the use of strategic factors in capital budgeting decision making using a questionnaire survey, and each of these took a context specific approach to its measurement. Strategic factors are considered the most important nonfinancial consideration in the evaluation of a capital budgeting proposal (Alkaraan & Northcott, 2007; Butler, 1991; Grundy & Johnson, 1993; Mohanty & Deshmukh, 1998) and are often concerned with ensuring that a capital budgeting project delivers a ‘competitive advantage’ to the firm (Emblemsvag & Endre Kjolstad, 2002; Lefley & Sarkis, 1997; Lefley, 2004; Proctor & Canada, 1992). In order to ensure that a capital budgeting project does deliver competitive advantage, Emblemsvag and Endre Kjolstad (2002) explain that managers often cross-link the characteristics of risks and strategy to carry out a ‘strengths, weaknesses, opportunities and threats’ (SWOT) analysis. Finally, the importance of a strategic analysis tends to increase as the “relative urgency for competitive or other reasons” increases (Ackerman, 1970, p. 348). For example, how the project will affect the competitive position of the company/unit in comparison to external competition (Butler, Davis, Pike, & Sharp, 1993).

As many hotels represent an owner/manager confluence there is a need to control for the size of the hotel owner because larger owners would conceivably have more resources at their disposal, which might enable them to invest more into specialised and sophisticated management control systems. This is particularly the case when it is recognised that it is the owner that generally funds most hotel capital expenditure. Furthermore, different types of hotel owner do often vary considerably in terms of their size and this size can therefore have a significant impact on the capital budgeting strategies that they adopt (see Turner & Guilding, 2014). Little empirical academic research was found, however, that had attempted to measure the size of a hotel owner. Industry publications such as Haast et al. (2006, p. 24), however, typically use the number of rooms owned as a measure of a hotel owner's size. For this reason, hotel owner size was measured by asking the GM “What is your hotel owner's approximate size in number of hotels owned (i.e. worldwide)?” This question yielded a mean of 323.36 and a standard deviation of 1021.86 (n ¼ 183). As the skewness and kurtosis on this variable were unacceptable, the natural log of this variable has been used in subsequent statistical analysis (Hair et al., 2010). This logged value for hotel owner size yielded a mean of 1.91 and a standard deviation of 2.30. 4.9. Hotel size An enduring finding is that company size is positively related to accounting sophistication (see Cadez & Guilding, 2008; Libby & Waterhouse, 1996), which hence brings about the need to control for hotel size. Larger hotels, for example, produce higher annual revenues and are likely to have more sophisticated accounting

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Table 3 Overview of questionnaire items used to measure “Degree of financial versus strategic orientation in capital budgeting appraisal”. Orientation Current study's questionsa Financial

Strategic

Mean & (standard deviation)

F1. The proposal is justifiable on financial grounds.

6.08 (0.88) n ¼ 200 F2. Cash flow and profitability forecasts support the proposal's viability. 5.86 (1.11) n ¼ 198 F3. The project's budget provides a good financial return. 5.91 (1.09) n ¼ 200 S1. The proposal can be justified on the basis of gaining marketplace competitive advantage. 5.32 (1.16) n ¼ 200 S2. The proposal is justified by a thoroughly conducted strategic analysis (e.g. competitive positioning analysis, SWOT analysis). 4.99 (1.51) n ¼ 199 S3. The project represents an opportunity to pre-empt the competition. 4.64 (1.45) n ¼ 198

a Prior to posing the questions, the questionnaire stated: “In your hotel, to what extent do the following factors influence whether an investment proposal is given the go ahead?” All items were posed using a 7-point Likert scale: 1 ¼ “not at all”; 7 ¼ “to a large extent”.

Table 4 Structure matrix for “Degree of financial versus strategic orientation in capital investment appraisal”. Questionnaire itema

Thematic origin of analysis

Component 1

F1 F2 F3 S1 S2 S3 a

Financial Financial Financial Strategic Strategic Strategic

2

0.776 0.801 0.835 0.786 0.595 0.827

Item codes provided in Table 3.

systems than smaller hotels (Lamminmaki, 2008). While several different approaches can be taken with respect to measuring hotel size, such as land area occupied, employee number, annual sales turnover and net profit, the number of rooms in a hotel is a commonly used indicator (Vallen & Vallen, 2005). Consistent with this convention, and in light of the advantages of discrete data, the questionnaire asked respondents “What is the approximate size of your hotel in number of rooms?” This measure generated a mean of 176.61 and a standard deviation of 117.17 (n ¼ 200). However, the skewness and kurtosis on this variable were unacceptable and so the natural log of this variable has been used in subsequent statistical analysis (Hair et al., 2010). This logged value for hotel size yielded a mean of 4.92 and a standard deviation of 0.77.

5. Results In order to formally test this current study's hypotheses, the following multiple regression equation was applied: Y ¼ b1MGMTCONTRACT þ b2OWNERINVOLVE þ b3EGOOWNER SHIP þ b4AGEHOTEL þ b5GMEXPERIENCE þ b6PUBLICVSPRIVATE þ b7OWNERSIZE(control) þ b8HOTELSIZE(control) þ e where Y is the degree of financial versus strategic capital budgeting appraisal orientation (dependent variable); MGMTCONTRACT, management contract adoption (hypothesis 1); OWNERINVOLVE, degree of owner involvement in the capital budgeting process (hypothesis 2); EGOOWNERSHIP, degree to which hotel ownership represents an ego-trip for the owner (hypothesis 3); AGEHOTEL, age of the hotel property (hypothesis 4); GMEXPERIENCE, experience of the GM (hypothesis 5); PUBLICVSPRIVATE, public versus private hotel ownership (hypothesis 6); OWNERSIZE, natural

Table 5 Results of regression analysis. Regression equation Y ¼ b1MGMTCONTRACT þ b2OWNERINVOLVE þ b3EGOOWNERSHIP þ b4AGEHOTEL þ b5GMEXPERIENCE þ b6PUBLICVSPRIVATE þ b7OWNERSIZE þ b8HOTELSIZE þ e Variable

bi standardised coefficient

t-statistic

MGMTCONTRACT OWNERINVOLVE EGOOWNERSHIP AGEHOTEL GMEXPERIENCE PUBLICVSPRIVATE OWNERSIZE(control) HOTELSIZE(control) Adjusted R2 F(df ¼ 8, 171) p

0.158y* 0.603z* 0.273y 0.065z 0.057y 0.051y 0.241z** 0.288z 0.509 23.149 0.000

1.852 2.469 1.541 0.843 0.716 0.664 2.871 1.072

MGMTCONTRACT, management contract adoption; OWNERINVOLVE, degree of owner involvement in the capital budgeting process; EGOOWNERSHIP, degree to which hotel ownership represents an ego-trip for the owner; AGEHOTEL, age of the hotel property; GMEXPERIENCE, experience of the GM; PUBLICVSPRIVATE, public versus private hotel ownership. Control variables include: OWNERSIZE, size of hotel owner; and HOTELSIZE, size of hotel. y One-tailed test. z Two-tailed test *p < 0.05. **p < 0.01.

logarithm of the size of the hotel owner in number of hotels (control); and HOTELSIZE, natural logarithm of the size of the hotel in number of rooms (control). Table 5 presents the results of the multiple regression analysis. The adjusted R2 reveals that 50.9% of the dependent variable's variation is explained by the independent variables. The model is statistically significant (F ¼ 23.149, p ¼ 0.000, df ¼ 8, 171).1 From Table 5 it is evident that support has been provided for hypothesis 1 (MGMTCONTRACT; p ¼ 0.033, p < 0.05; one-tailed), which posited that capital budgeting appraisal would be more

1 Table 5 reports the results of a regression analysis where missing cases were excluded listwise, signifying that the analysis was based on 171 cases (i.e. 29 cases had one or more missing values). A missing values analysis revealed that missing data were missing completely at random (MCAR) (Little's MCAR test: ChiSquare ¼ 31.640, df ¼ 36, p ¼ 0.676). Using the ‘Missing Values Analysis’ function in SPSS, an Estimation Maximisation (EM) dataset was derived and the multiple regression re-run based on the EM dataset. Consistent with the model reported in Table 5, the results of this EM multiple regression model were statistically significant (F ¼ 25.511, p < 0.000, df ¼ 8, 196). Likewise, the results of hypothesis testing remained largely the same.

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financially oriented in hotels that operated with a management contract. However, contrary to the direction anticipated in the development of hypothesis 2, a statistically significant relationship was found for the view that capital budgeting is instead more, rather than less, financially oriented in hotels that have high owner involvement in the capital budgeting process (OWNERINVOLVE; p ¼ 0.015, p < 0.05, two-tailed). No support has been provided for the hypotheses surrounding ego-trip ownership (EGOOWNERSHIP; p ¼ 0.062, p > 0.05, one-tailed), age of hotel property (AGEHOTEL; p ¼ 0.200, p > 0.05, one-tailed), experience of the GM (GMEXPERIENCE; p ¼ 0.237, p > 0.05, one-tailed), or public versus private hotel ownership (PUBLICVSPRIVATE; p ¼ 0.253, p > 0.05, onetailed). 6. Discussion The main findings of this research study are for the positive affect that management contract adoption (MGMTCONTRACT; p ¼ 0.033, p < 0.05; one-tailed) and hotel owner involvement in the capital budgeting process (OWNERINVOLVE; p ¼ 0.015, p < 0.05, two-tailed) had on a financial orientation. The result concerning hotel management contract adoption was in the direction as hypothesised. However, this was not the case for the hypothesis in connection with hotel owner involvement in the capital budgeting process. Rationale for the hotel owner involvement result can be drawn from Turner and Guilding (2012). For example, they found agents who prepare capital budgeting proposals to demonstrate an innate propensity to engage in the optimistic biasing of financially oriented capital budgeting cash flow forecasts. An owner's involvement and hence emphasis on a financial orientation may therefore enable them to be better positioned to be more vigilant for such cash flow forecast biasing and to police its minimisation (Dutta, 2003). This greater capacity to maintain vigilance and policing over potential cash flow biasing might therefore instil greater owner confidence in the application of financially oriented capital budgeting appraisal techniques vis-vis strategic techniques which, in turn, may result in their a greater application. Another possibility for the positive affect of hotel owner involvement on the financial orientation of capital budgeting may relate to the principle of controllability and performance evaluation. Controllability means that people should be held accountable only for what they can control (Merchant & Otley, 2006). By nature, financial information is often considered to be more objective and hence verifiable than nonfinancial information (Farragher, Kleiman, & Sahu, 1999; Myers, Gordon, & Hamer, 1991; Smith, 1994). If managers have no direct impact on an outcome, then it should serve no meaningful purpose to hold them accountable for that outcome. As Antle and Demski (1988, p. 701) explain, for a manager to “control” an evaluation statistic, the question which needs to asked is “whether his or her supply of inputs is able to affect the probability distribution of the output statistic”. From the perspective outlined above, it appears as pertinent to highlight the increasingly commonplace engagement of an asset manager by hotel owners who are employed to monitor the GM (Armitstead, 2004; Swing, 2004). This appointment is designed to facilitate a more productive alignment of interests (Capital Hotel Management, 2006; Feldman, 1995; Geller, 2002).2 Without asset managers “it is almost certain than more monies will be spent than necessary” (Johnstone & Duni, 1995, p. 129) and GMs

2 “Asset management is the fiduciary responsibility of optimising the value of ownership's lodging holdings” (Harris & Mongiello, 2006, p. 302).

agree that when there are asset managers overseeing their work they must run a tighter ship (Feldman, 1995). However, while there should be significant information flow between the GM and the asset manager, in some instances the asset manager may be deprived of information that would enable them to make informed decisions about the GM's work (Rainsford, 1994; Schlup, 2004). If this is the case, it is possible that asset managers may deem capital budgeting proposals prepared from a financial perspective to enable greater objectivity, verifiability and hence controllability so as to evaluate the performance of the hotel property's GM. Drawing back to both of this current study's findings, which concern management contract adoption and hotel owner involvement in the capital budgeting process, it would appear equally important to highlight how in these situations that strategic factors have been given less emphasis compared to financial factors. On several counts this might reasonably be expected to result in sub-optimal capital budgeting decisionmaking. Strategic factors, for example, have been considered the most important nonfinancial consideration in the evaluation of capital budgeting proposals (Alkaraan & Northcott, 2007; Butler, 1991; Grundy & Johnson, 1993; Mohanty & Deshmukh, 1998) because financially oriented capital budgeting appraisal techniques often fail to capture many of the strategic benefits that can be derived from capital budgeting projects (Drury & Tayles, 1995; Lefley & Sarkis, 1997; Naik & Chakravarty, 1992). More importantly, an over-reliance on financial capital budgeting information is known to bias decision-makers against certain investment projects (Ashford et al., 1988; Cheung, 1993; Phelan, 1997). Incorporating strategic factors are essential to strategy related goals (e.g. Alkaraan & Northcott, 2006; Carr & Tomkins, 1996). Consider the balanced scorecard approach to performance evaluation. Financial factors are merely the product (i.e. lagging indicators) of nonfinancial factors (i.e. leading indicators) (see e.g. Kaplan & Norton, 2001). The enhancement of strategic factors such as competitive advantage should, for example, be one of a managers' main areas of focus (Burcher & Lee, 2000) and the importance of a such analyses tends to increase as the “relative urgency for competitive or other reasons” increases (Ackerman, 1970, p. 348). If a hotel property's long-term survival often depends on its capacity to efficiently and readily attend to the changing needs and expectations of its customers and to adapt to changes in competition (Sin, Alan, Heung, & Yim, 2005), it would therefore appear counterproductive that strategic factors are deemphasised in hotels that adopt a management contract and where there is higher hotel owner involvement in the capital budgeting process. 7. Conclusion On several dimensions, this study appears to constitute a significant work. Firstly, the volume of academic research that has been directed to furthering an understanding of the nature and context of capital budgeting decision making represents a strong testimony with respect to its profound importance. The degree of research endeavour that has been invested in surveying capital budgeting practice is apparent from studies attempting to synthesise and generalise findings to wider populations (Pike, 1996). However, despite the extent and apparent importance that has been afforded to capital budgeting research by academics, no prior survey research had been found to have analysed factors surrounding the relative emphasis attached to a financial versus strategic orientation in capital budgeting at the hotel property level. This signifies that the current study has a considerable degree of novelty for an academic work that focuses on capital

M.J. Turner / Journal of Hospitality and Tourism Management 33 (2017) 31e42

budgeting. The main contributions of this research relate to the greater emphasis GMs attach to a financial orientation in capital budgeting when there is a management contract (MGMTCONTRACT; p ¼ 0.033, p < 0.05; one-tailed) and also where the hotel owner gets more involved in the capital budgeting process (OWNERINVOLVE; p ¼ 0.015, p < 0.05, two-tailed). At a theoretical level each of these perspectives appears capable of rationalisation from an agency theory monitoring viewpoint. In capital budgeting the most common mechanism by which monitoring control is enacted is through the use of a post-completion audit (Haka, 2007). This has important implications for practice because the overarching goal of a post-completion audit is to foster more accurate forecasting by making forecasters aware that their efforts will be reviewed (Farragher et al., 1999), and that the review outcomes will be used to administer rewards such as promotion, and punishments such as denials of promotion (Koch, Mayper, & Wilner, 2009). However, post-completion audits are known to sometimes have unintended deleterious effects where an agent can become more conservative or even shy away from projects when proposing capital budgeting projects (Koch et al., 2009). A significant facet of this study is its focus on a particular industry, the hotel industry, and at the hotel property level. Many of the factors investigated in this study may not have been examined had a generic, cross-industry, survey approach been taken, for example, hotel owner involvement in the capital budgeting process. However, with some slight modification, several of the variables examined in this current study might well be suitable for application to related contextual settings. Consider changing from a hotel owners' involvement to a principal's involvement. Also, rather than management contracting, consider joint ventures. Although there are two separate owners in such a situation, they essentially form an owner-operator structure through each owner's partial ownership (Contractor & Kundu, 1998). Use of joint ventures appears particularly widespread in parts of Asia (particularly China) as a result of laws and regulations that prevent whole ownership from foreign investors (see e.g. Kivela & Leung, 2005; Van der Linden, 2007). In more developed markets, however, although joint ventures have appeared favourable in theory, their forecasted benefits have often not accrued (Canina, 2001). In the U.S., for example, fewer than half of the hotel consolidations between 1982 and 2000 created any value (Canina, 2001). These problems would appear to provide ample motivation for future research to examine the hotel capital budgeting practices of hotel joint ventures. Overall the findings of this study provide considerable insight with respect to the way in which accounting systems operate at the hotel property level; offering a unique opportunity to hoteliers to better understand and potentially improve capital budgeting processes. Hence, this current study's focus on particular issues and facets that are specific to a particular industrial sector is a highly distinguishing characteristic and the vast majority of management accounting survey work has been conducted in a cross-sector manner. Such research is therefore bound to be insensitive to particular operating facets that are peculiar to a specific industrial sub-sector. A key limitation of this study, however, relates to the ‘intentionality’ of GMs' emphases attached to a financial versus strategic orientation in capital budgeting. The concept of “bounded rationality”, for example, involves the idea that individuals are often but not always strictly “rational”. From this perspective capital budgeting decision making becomes more complicated

39

than is suggested by the financially oriented capital budgeting literature (Pinches, 1982). Consider how the mere knowledge that a preparer's proposal will be subjected to a formal review afterward can sometimes encourage different managerial actions beforehand (Gordon & Myers, 1991). Mintzberg, Raisinghani, and Thoeoret (1976, p. 259), for example, claims that in making capital investment decisions “evaluation gets distorted both by cognitive limitations, that is, by information overload and by unintended as well as intended biases”. Further research is therefore called for to directly investigate the intentionality of the emphasis GMs attach to a financial versus strategic orientation in capital budgeting. Notwithstanding this study's limitations, its findings suggest that considerable insights might well derive from the conduct of more management accounting research that is thoughtfully grounded in key operational or structural facets that represent distinguishing facets of a particular industrial sector. Recognition of this factor underscores the extent to which cross-sector surveys suffer from a lack of calibration that renders them incapable of picking up on key organisational nuances that populate one or only a few industrial sub-sectors. In addition, when interpreting the study's results it should be born in mind that some of the measures used had to be developed due to insufficient prior focus on the constructs of interest. This signifies that such measures do not carry the benefit of prior validation. Although there is no strong reason suggesting that the measures have failed to adequately measure the intended constructs, it is possible that this may have occurred. In light of the study's relative novelty, further research directed towards replicating all or part of the work is to be encouraged.

Author's statement This research does not have any conflicts of interest and does not have any required financial disclosure statements.

Acknowledgement The author thanks Chris Guilding for feedback and suggestions on an earlier version of this paper.

APPENDIX. Means, std. dev., skewness, kurtosis

Variable

Mean

Std. Dev.

Skewness

Kurtosis

MGMTCONTRACT OWNERINVOLVE EGOOWNERSHIP AGEHOTEL GMEXPERIENCE PUBLICVSPRIVATE OWNERSIZE HOTELSIZE

e 5.52 3.93 23.17 3.91 e 1.91 4.92

e 1.30 1.18 23.50 4.16 e 2.30 0.77

e 0.103 0.005 0.250 0.229 e 0.172 0.057

e 0.115 0.019 0.692 0.646 e 0.225 0.016

MGMTCONTRACT, management contract adoption; OWNERINVOLVE, degree of owner involvement in the capital budgeting process; EGOOWNERSHIP, degree to which hotel ownership represents an ego trip for the owner; AGEHOTEL, age of the hotel property; GMEXPERIENCE, experience of the GM; PUBLICVSPRIVATE, public versus private hotel ownership; OWNERSIZE, size of hotel owner; and HOTELSIZE, size of hotel.

40

APPENDIX. Questionnaire survey

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M.J. Turner / Journal of Hospitality and Tourism Management 33 (2017) 31e42

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