Corporate Investment and Hotel Firm Value: Does Corporate Governance Matter in Financially Constrained Firms?

Abstract

Corporate investments are expected to create value for firms. Although some studies report evidence supporting such expectations, many studies document contradictory findings. However, it is not clear why corporate investments create value in some firms but reduce value in others. The purpose of this study is to examine the extent to which the quality of corporate governance and the degrees of financial constraints affect the relationship between corporate investments and hotel firm value in a unified model where both weak corporate governance and financial constraint problems are concurrently observed. Shareholders of poorly governed firms place a lower value on corporate investments compared with those of well-governed firms, whereas shareholders of financially constrained firms perceive corporate investments to be of greater value compared with those of unconstrained firms. The results further showed that CEOs of financially constrained firms make value-increasing investments despite poor corporate governance mechanisms. Theoretical and practical implications are discussed within the realm of corporate finance theories.