Performance implications of capital structure: evidence from quoted UK organisations with hotel interests

The objective of this article is to foster research on the relationship between capital structure and corporate performance with hotel companies. Using data collected from 43 UK quoted organisations which possess an interest in owning and managing hotels, Modigliani and Miller's (1958 Modigliani, F and Miller, MH. 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(No.3): pp.261–97 Google Scholar]) capital structure irrelevancy theorem is tested. Empirical analysis revealed no significant relationship between the level of debt found in the capital structure and financial performance. These results are consistent with Modigliani and Miller's theorem. Results also highlight that low levels of returns on equity are a feature of the sample. This latter point appears to an important issue for hotel investment, as hotel companies are continually looking to raise external finance to fund expansion. The findings of the study suggest that Chief Financial Officers of the sample organisations need to identify novel ways of expanding the business without increasing the levels of debt. The article concludes by providing examples of how some Chief Financial Officers are responding to the challenges of capital structure.