The Impact of Leverage on Stock Returns in the Hospitality Sector: Evidence from the UK

Abstract

This article examines the relation between capital structure and abnormal returns for the UK hospitality sector by using an investment strategy based on hospitality firms' capital structure. We find that abnormal returns are higher, 0.53% per annum, for medium leverage hospitality firms, and it can be increased up to 0.91% by investing in medium leverage and low price-to-book value firms. The findings raise an important issue for the hospitality sector as the firms in this sector are continually aiming to raise external finance to fund expansion. This is a unique situation when compared to other sectors in the economy whereby investors earn higher abnormal returns when investing in low levered firms.