International Journal of Contemporary Hospitality Management

The moderating effect of CEO duality on the relationship between geographic

diversification and firm performance in the US lodging industry
Hyoung Ju Song, Kyung Ho Kang,
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Hyoung Ju Song, Kyung Ho Kang, (2019) "The moderating effect of CEO duality on the relationship
between geographic diversification and firm performance in the US lodging industry", International
Journal of Contemporary Hospitality Management, https://doi.org/10.1108/IJCHM-12-2017-0848
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Moderating
The moderating effect of CEO effect of CEO
duality on the relationship between duality

geographic diversification and

firm performance in the US
lodging industry Received 31 December 2017
Revised 23 April 2018
24 September 2018
Hyoung Ju Song and Kyung Ho Kang Accepted 18 November 2018
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College of Hotel and Tourism Management,

Kyung Hee University, Seoul, Republic of Korea

Abstract
Purpose – The purpose of this study is to investigate the moderating role of CEO duality on the geographic
diversification–firm performance relationship in the US lodging industry.
Design/methodology/approach – To examine the individual effect of geographic diversification and
the moderating effect of CEO duality, this study adopts random effects regression. Additionally, to
appropriately address the endogeneity issue, this study uses random effects regression with the instrumental
variable method. The sample period spans 1990-2015 and 258 firm-year observations are included.
Findings – This study finds that geographic diversification has a positive and significant effect on firm
performance. Also, the result shows a positive and significant moderating role of CEO duality, which implies
that the magnitude of the impact of geographic diversification on firm performance is significantly greater
when CEO duality exists.
Research limitations/implications – Although it has a limitation of applying the results of this study
to privately held lodging firms in other countries, US public lodging firms are encouraged to consider a
corporate governance structure incorporating CEO duality to maximize the effect of geographic
diversification on firm performance.
Originality/value – This study contributes to the hospitality literature by providing a unique dimension
that the influence of geographic diversification is contingent on the adoption of CEO duality. And, the results
of this study provide practical guidelines for the lodging firms’ implementation of geographic diversification.
Keywords Firm performance, CEO duality, Moderating effect, Stewardship theory,
Geographic diversification
Paper type Research paper

1. Introduction
Shareholders who have voting rights according to shares of capital stock select a board of
directors, and a board of directors as a representative of shareholders, while supporting and
advising managers, has an authority to decide a firm’s business activities and monitor
managerial performance, based on shareholders’ interests and the overall firm performance
(Fama and Jensen, 1983a). Under the supervision of a board of directors, managers are
responsible for managing a firm in the best interest of shareholders (Guillet and Mattilla,
2010). Accordingly, the interaction between a board of directors and managers significantly International Journal of
influences managerial decision-making and firm performance (Oak and Iyengar, 2009). Contemporary Hospitality
Management
Among multiple factors determining a relationship between managers and a board of © Emerald Publishing Limited
0959-6119
directors, CEO duality, a state occurring when CEO holds the position of the chairman of the DOI 10.1108/IJCHM-12-2017-0848
 IJCHM board of directors, has been a core issue, as it allows CEO to possess excessive power in
governance control and management, compared to the board (Peng et al., 2007). Despite
controversy over CEO duality, in practice, a large number of firms adopt CEO duality for
organizational flexibility and adaptability (Finkelstein and Mooney, 2003). Especially, US
lodging firms, including Intergroup Corp., Four Seasons Hotels and Wyndham International
INC, more frequently adopt CEO duality than firms in other industries to make strategic
decisions effectively and swiftly in volatile business environments (Oak and Iyengar, 2009).
In accordance with decision-making determined by a board of directors and managers,
firms in multiple industries have diversified pervasively the geographic scope of businesses,
expanding their operations into multiple geographic markets (Ramaswamy, 1995) to enjoy
economies of scope, which significantly affects firm performance and shareholders’ wealth
(Chang and Wang, 2007). Particularly, lodging firms have adopted geographic
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diversification as a core strategy for decades to escape from a saturated market with
established brands, maximize synergetic effects among business operations in multiple
locations and reduce firm-level risks sensitive to seasonal and economic factors (Kang and
Lee, 2014).
To date, according to the prevalence of geographic diversification in various industries,
multiple studies have examined the effect of geographic diversification on firm performance
(Chang and Wang, 2007). In spite of the proliferation of studies, theoretical perspectives and
empirical results have been inconclusive thus so far. A group of researchers found the
geographic diversification’s positive impact (Han et al., 1998), grounded on portfolio theory
(Lintner, 1965), market power view (Montgomery, 1994) and resource-based view (Barney,
1991). On the other hand, other studies found that geographic diversification affects firm
performance negatively, consistent with arguments of the transaction cost theory (Jones and
Hill, 1988) and the agency theory (Jensen, 1986). Similarly, in the context of the lodging
industry, while Kang and Lee (2014) found a positive effect of geographic diversification on
firm performance, Lee and Jang (2007) failed to find a significant effect of geographic
diversification on financial performance of lodging firms.
The inconsistency in findings of the empirical studies may be attributable that the
relationship between geographic diversification and firm performance is complex and not
independent, being intertwined with other firm-specific or industry-specific characteristics,
such as market diversification (Kang and Lee, 2014), intangible assets (Lu and Beamish,
2004) and business group affiliation (Kotabe et al., 2002). In other words, to appropriately
and comprehensively investigate the geographic diversification-firm performance
relationship, other critical factors that may affect the relationship need to be included in the
examination.
When making a decision on diversifying the business scope into other locations,
managers and a board of directors interact with each other, based on their own interests,
powers and rationales. As CEO duality determines the balance of powers in governance
control and the interaction structure (Peng et al., 2007), it may play a critical role in deciding
the implementation of geographic diversification. That is, CEO’s self-interest seeking
behavior reinforced by duality position may destroy benefits from geographic
diversification, or contrarily, potent leadership and unity of command established by
holding the position of the chairman of the board may accelerate gains and mitigate costs
from geographic diversification. Especially, in the context of the lodging industry where
high brand familiarity exists, while CEO duality does not affect the geographic expansion’s
effect directly through customers’ selection of hotel brands, CEO duality in lodging firms
may influence the geographic diversification–firm performance relationship through
strategic decision-making process associated with benefits and costs from geographic
 diversification. Thus, the geographic diversification’s influence on firm performance may Moderating
differ, depending on the adoption of CEO duality. Given the strategic importance of effect of CEO
geographic diversification possibly interrelated with CEO duality and industry-specific
characteristics of the lodging industry, a proper examination of the effect from geographic
duality
diversification on firm performance in the lodging industry needs to incorporate CEO
duality as an intervening factor. In spite of those meaningful implications, to date, an
examination with regard to the moderating role of CEO duality has not been examined.
Accordingly, the purpose of this study is to investigate the CEO duality’s moderating
effect in the lodging industry context. First, we aim to investigate whether geographic
diversification affects firm’s financial outcomes and investigate whether the impact of
geographic expansion increases when combined with CEO duality. The current study is the
first empirical study focusing on the moderating role of CEO duality, one of the most
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controversial corporate governance issues, in the lodging industry context. This study
makes a contribution to the literature by offering a unique dimension that the impact of
geographic expansion differs, depending on the adoption of CEO duality. In addition, the
study offers practical implications to practitioners, potential investors and other
stakeholders in the lodging industry, providing an insight that corporate governance
structure incorporating CEO duality needs to be considered to maximize the geographic
diversification’s impact in relation to firm performance. The following section
comprehensively reviews relevant literature, including theoretical backgrounds, empirical
evidence and hypotheses development for the effect of geographic diversification on firm
performance and the moderating effect of CEO duality. Chapter 3 indicates methodology,
data, models, estimation methods and measurements. Chapter 4 presents the results, and the
discussion and limitation finalize the paper.

2. Literature review and hypotheses development

2.1 The effect of geographic diversification on firm performance
Many researchers have focused on the reasons of firms’ adopting geographic diversification
as a core corporate strategy and the relationship between geographic diversification and
firm performance (Montgomery, 1994). According to the literature, different theories and
perspectives have been suggested regarding concomitant advantages (Geringer et al., 2000)
and disadvantages (Tallman and Li, 1996) from geographic diversification.
A stream of researchers explains benefits of geographic diversification, based on the
portfolio theory, the market-power view and the resource-based view (Montgomery, 1994;
Kang and Lee, 2014). The portfolio theory argues that geographic diversification acts as a
means of reducing risk and bankruptcy costs (Lintner, 1965), as diversified firms can benefit
of the stabilized overall returns caused by uncorrelated goods (Kim et al., 1989), regulations
(Caves, 1982) and economic conditions (Rugman, 1976) across locations where the firm
operates its businesses. And, some researchers, grounded on the market power view,
propose that as a firm expands business operations geographically, they can achieve a
conglomerate power over its suppliers, distributors and customers, which results in gaining
a great bargaining power, achieving a dominant position and reducing competition
(Montgomery, 1994). Next, while conducting geographic diversification, a firm can utilize
excessive resources (e.g. skills and knowledge) in the organization (Nelson and Winter,
1982). According to Barney (1991), who proposed the resource-based view, by establishing
and reinforcing resources and capabilities while diversifying operations, firms can obtain
competitive advantage.
On the other hand, based on the transaction cost theory, as firms expand business
activities into multiple markets, they become more complex, being involved in complicated
 IJCHM factors including natural environments, regulations and cultural diversity (Jones and Hill,
1988). To deal with those complexities, internal transaction costs (e.g. coordination and
information costs) increase, which leads to a negative influence on firm performance (Kang
and Lee, 2014). In addition, agency theorists assert that when firms adopt diversification,
managers may seek their own interests at the expense of shareholders’ ones (Jensen, 1986). It
is because, dissimilar to shareholders, managers tend to derive their own wealth from a
single source, on which their job, reputation, human capital and income are concentrated
(Wang and Barney, 2006). Thus, managers may conduct even value-destroying
diversification only to gain their own profits and entrench positions (Shleifer and Vishny,
1989).
From empirical examinations, based on theoretical backgrounds for benefits from
diversification, some researchers found a positive relationship between geographic
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diversification and firm performance (Grant, 1987; Chang and Wang; 2007), whereas
empirical studies conducted by other scholars indicate a negative relationship, supporting
theoretical viewpoints about costs of geographic diversification (Fauver et al., 2004; Lang
and Stulz, 1994).
Inconclusive empirical evidences on the geographic diversification–firm performance
relationship may be because of different research methodologies and operationalization
(Kim and Mathur, 2008). In addition, according to Grant (1987), contrary empirical results
may be because of possible moderators (e.g. firm size, R&D and industry). From this
viewpoint, the relationship between geographic diversification and firm performance is
complex and not independent from firm- and industry-specific factors (Lee et al., 2010).
Among those factors, size of a firm needs to be considered because large firms are likely to
enjoy the economies of scale and market power, which may lead to greater financial market-
based value. A firm’s leverage needs to be comprehended to control for benefits (e.g. the tax
shield effect) and costs (e.g. negative market perception) from a capital structure.
Specifically, a firm may benefit from an increased debt, as interest expense is tax deductible
(McConnell and Servaes, 1990). Contrastingly, an increased debt also may adversely
influence financial returns, as a market recognizes that the firm is risky (Brealey and Myers,
2003). Growth opportunity is another factor which possibly affects firm performance when
implementing geographic diversification. Specifically, growth opportunities and excess
resources may affect a firm’s performance, while a firm expands its operations
geographically (Barney, 1991).
With regard to the geographic expansion-firm performance relationship, a limited
number of empirical studies have been conducted, using a sample of lodging firms. Kang
and Lee (2014), with 176 firm-year observations from 1993 to 2010, found that geographic
expansion positively influences lodging firms’ performance. Contrarily, Lee and Jang (2007),
using 36 publicly traded lodging firms, examined the differences in financial performance
and stability, contingent on the degree of diversification and suggest that lodging firms’
diversification leads to an increase in stability but not financial performance. In addition,
geographic diversification conducted by a lodging firm can become more effective when a
lodging firm operates a brand portfolio (Kang and Lee, 2014). That is, when a lodging firm
operates a brand portfolio composed of various brands for different segments, the firm may
have more targeting options for a specific location when entering geographic markets.
Moreover, the learning effect from launching new brands may strengthen the effectiveness
in expanding geographic diversification.
As firms expand businesses operations into diverse locations, firms may obtain benefits
and bear costs simultaneously. Especially, geographic diversification in the lodging
industry requires greater initial investments to build up an entire business structure in each
 location because of the inseparability of production and consumption, which causes reduced Moderating
firm performance at the beginning stage. Moreover, greater requirements for adapting to effect of CEO
local culture and host countries’ regulations incur incremental costs (Capar and Kotabe,
2003).
duality
However, those initial costs may be sufficiently covered by benefits as a firm increases
the degree of geographic diversification. Given that business units in each geographic
location are independent according to the simultaneity aforementioned and management
factors are not highly correlated with each other across diverse locations, a lodging firm’s
geographic expansion creates a greater portfolio effect than firms in other industries. As the
lodging industry is exposed to firm level risk because of high sensitivity to economic
conditions and environmental factors to a greater extent (Basham and Kwon, 2009), reduced
operational risk and stabilized return from the portfolio effect generated by geographic
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diversification are especially crucial.

Further, pondering an intensive competition in the hotel industry (Basham and Kwon,
2009), the market power advantage from geographic diversification may be particularly
enlarged in the lodging industry. That is, as lodging firms preempt strategically important
locations and other resources while diversifying geographic locations and incorporating
small properties in each location, they can easily achieve dominant positions and gain
bargaining power, which lead to obtaining competitive advantage (Kang and Lee, 2014).
Specifically, the lodging industry is significantly involved in high risks and low
profitability (Skalpe, 2007). In this context, benefits of mitigating risks through the portfolio
effect and increasing profitability through strengthened market power while conducting
geographic diversification may outweigh costs that are inevitably high at the initial state of
geographic diversification but attenuated gradually as the level of geographic
diversification increases. Thus, the current study hypothesizes that:

H1. The effect of geographic diversification on firm performance in the US lodging

industry is significant and positive.

2.2 The moderating role of CEO duality

CEO duality, the practice of combining roles and titles of CEO and the board’s chairman of a
firm (Peng et al., 2007), has been adopted by a large number of firms in modern economies
(Finkelstein and Mooney, 2003). In accordance with the prevalence of CEO duality in the
corporate governance context, multiple studies have been performed regarding CEO duality.
Especially, the effect of CEO duality has been a controversial issue from the two conflicting
perspectives (i.e. the agency theory and the stewardship theory) in regard to costs and
benefits of CEO duality (Kim et al., 2009).
Agency theorists argue negative sides of CEO duality, as CEO duality allows CEO to
possess dominant power over the board, which obstructs the board’s role of monitoring and
disciplining CEO and executive managers (Tang, 2016). Specifically, with such enhanced
power and mitigated interruption from the board, CEO is more likely to pursue personal
interests at the expense of shareholders’ ones, which incurs substantial agency costs.
Contrastingly, other researchers, based on the stewardship theory, underscore benefits of
CEO duality, arguing that combining two separate senior management positions (i.e. CEO
and chairman) into one improves efficiency in corporate leadership, thereby establishing
unity of command (Bhagat and Black, 2001). And, unity of command clarifies the authority
and responsibility in an organization and increases the power of CEO, thereby making
crucial decisions swiftly (Finkelstein and D’Aveni, 1994). This strengthened leadership
structure motivates CEO to behave as a responsible steward of the resources he controls
 IJCHM (Davis et al., 1997). Moreover, because of the image of CEO with strong leadership, firm can
obtain supports and additional resources from internal and external stakeholders, thereby
enhancing firm performance (Pfeffer and Salancik, 1978).
In the hospitality industry, there are several industry unique characteristics that
influence corporate structures including high dependency on short-term strategic decisions
and sensitiveness to seasonality and economic conditions’ changes (Reich, 1994; Guillet
et al., 2013). Based on those distinctive characteristics in the hospitality industry, some
researchers argue that non-CEO duality as a corporate structure of a hospitality firm may
hamper the executive’s decisions and implementations needed to proceed promptly, as
separating titles sometimes accompanies excessive coordination and information
transferring costs between the board and managers (Guillet and Mattilla, 2010). In other
words, hospitality firms can achieve benefits from CEO duality that enables managers to
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exercise united control and conduct efficient strategic decision-making, especially when
volatile factors caused by seasonality and economic climates should be considered for
strategic choices and implementations (Boyd, 1995). An empirical study conducted by Oak
and Iyengar (2009), by comparing hospitality firms with non-hospitality firms between 1998
and 2003, indicates that hospitality firms are more likely to adopt CEO duality than non-
hospitality firms and that practice contributes to efficient strategic decision-making, which,
in turn, leads to better firm performance. Similarly, Guillet et al. (2013) found a positive effect
of CEO duality on firm performance in the US restaurant industry for the period 1992-2008.
A limited number of studies in relation to CEO duality in the lodging industry exist in the
current literature. For example, the study conducted by Jarboui et al. (2015) investigated the
impact of corporate governance on firm performance in the Tunisian lodging industry,
using CEO duality as a proxy for corporate governance. They found that non-CEO duality
affected positively firm performance by reducing agency costs and enforcing CEO to focus
more on staff suggestions. Ozdemir and Upneja (2012) used CEO duality as a proxy for
board control when examining the relationship between CEO compensation and CEO
duality in the US lodging industry. The result of the study indicates that CEO duality leads
to higher CEO compensation.
Literature suggests that the corporate strategy–firm performance relationship may
differ, contingent on characteristics of a firm, which heavily influences strategic decision-
makings (Oak and Iyengar, 2009). Especially, the existence of CEO duality that possibly
intervenes a decision-making on the implementation of geographic diversification with the
reinforced agency problem and/or combined leadership may be a core factor to be
comprehended when examining the relationship between geographic diversification and
firm performance.
In the context of the hospitality industry with a unique characteristic of higher initial
costs because of the simultaneity of production and consumption, the structure and
operations of the firm may become more complex while strategically incorporating business
units in diverse locations where each property operates independently, dealing with
different culture and regulations in each geographic market. Such a complicated
organizational structure generated by extensive geographic diversification incurs
incremental coordination and information processing costs, as the transaction cost theory
argues (Palich et al., 2000). In this situation, managers and a board of directors need to
conduct strategic choices accurately and swiftly to adapt a firm’s operations to each peculiar
local environment with sufficient flexibility required to handle high volatility accompanied
by the lodging firm’s geographic diversification (Guillet et al., 2013). In general, adopting
CEO duality provides clearer directions through unity of command and faster responses to
external events as the stewardship theory suggests (Boyd, 1995) and, at the same time,
 reduces coordination costs and information asymmetries between managers and the board Moderating
of directors (Kim, 2013). Thus, CEO duality in lodging firms can mitigate transaction costs effect of CEO
caused by geographic diversification and facilitate executives’ fast decision-makings, which
is especially required in the lodging industry’s competitive business environments
duality
demanding brilliant intuition for satisfying fickle customer needs.
In addition, CEO may be more knowledgeable about detailed information of specific
geographic markets and management status of each business unit than other stakeholders
(Desai et al., 2003), thereby enhancing activity sharing across diverse business units, which
is a critical source of economies of scope. Additionally, CEO duality accelerates the
efficiency advantage of internal capital market created by geographic diversification by
allocating the right amount of capital at the appropriate cost to each business unit in a
particular location with accurate information about performance and alleviating substantial
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information-processing through fortified authority.

Furthermore, in the lodging industry, CEOs tend to own greater amounts of outstanding
stocks of a firm, compared to CEOs in other industries (Oak and Iyengar, 2009).
Accordingly, interests of CEO and shareholders in a lodging firm are aligned to a greater
extent, which reduces the agency problem in which CEOs seek their own interests at the
expense of shareholders’ ones. In addition, given that firms in the lodging industry tend to
be more dependent on debt financing with higher leverage ratio than firms in other
industries (Andrew et al., 2007), lenders execute a potent monitoring role on CEO’s activities,
which may substantially restrain agency costs reinforced by CEO duality when adopting
and implementing geographic diversification. Although the current study postulates that
geographic diversification positively affects a firm’s performance, geographic
diversification may incur some potential costs (e.g. the transaction costs and the agency
costs) aforementioned. While implementing geographic diversification, CEO duality,
grounded on the stewardship theory, may mitigate costs and enlarge benefits from
geographic diversification, which finally amplifies the magnitude of the positive impact of
geographic diversification on Tobin’s q. Therefore, the current study suggests the
hypothesis:

H2. CEO duality positively moderates the geographic diversification–firm performance

relationship. In other words, the influence of geographic diversification on Tobin’s q
is greater under CEO duality than non-CEO duality.

3. Methodology
3.1 Data
The sample of the current study consists of publicly traded US lodging firms, based on the
North American Industry Classification System (NAICS) code 721110 (hotels except casino
hotels and motels). 10-Ks (annual reports) and DEF14As (other definitive proxy statements)
provide data of firm performance, geographic diversification, CEO duality and other control
variables. The sample period spans 1993-2017 to comprehensively include publicly traded
firms filing 10-Ks (annual reports) and DEF14As (other definitive proxy statements) in the
Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) in the sample. After
eliminating firms with missing values, the study obtained 262 firm-year observations.

3.2 Dependent variable

To operationalize firm performance, we use Tobin’s q, a dependent variable, which has been
regarded as a better measure, compared to accounting-based measures and stock return
 IJCHM measures (Lang and Stulz, 1994). It is attributable that while Tobin’s q is regarded as an
unbiased estimate for measuring current firm value, both accounting-based measures and
stock return measures are ex post approaches over sample periods (Lang et al., 1989).
Specifically, this study uses the approximate Tobin’s q suggested by Chung and Pruitt
(1994) to facilitate data collection and simplify the computation. The approximate Tobin’s q
is defined as (MVE þ PS þ DEBT)/TA, where MVE is the product of a firm’s stock price
and the number of common shares outstanding; PS represents the liquidating value of
outstanding preferred shares; DEBT is the value of short-term liabilities, net of short-term
assets plus the book value of total assets; TA represents the book value of total assets.

3.3 Independent variables P

We use the Berry–Herfindahl index (1  Si2) for measuring geographic diversification
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which has been considered as a proper measure of diversification (Denis et al., 2002), as the
index integrates both entities’ numbers and each entity’s weight. In this study, Si indicates
properties of each state-total properties ratio in a domestic country. For a unit of geographic
regions, this study uses US state considering operational scope and different characteristics
of each state as a distinctive geographic market. For CEO duality (DUAL), a moderator, this
study assigns 1 when CEO duality occurs, and 0 otherwise (Chen et al., 2008). In addition, to
examine the moderating effect, the current study uses an interaction term between the
degree of geographic diversification (GD) and CEO duality (DUAL).
This study includes five relevant control variables to control probable influences on the
dependent variable. First, this study includes a firm’s size (SIZE), measured by the log of
total assets. Second, a firm’s leverage (LEV) is measured by debt-to-asset ratio. Third,
growth opportunity (GO) is adopted, measured by capital expenditure divided by sales.
Next, this study includes two additional control variables specifically associated with the
study’s context. The degree of internationalization (INT), measured by the number of
foreign properties divided by the number of total properties, considers probable positive or
negative results of operations in foreign markets (Doukas and Lang, 2003). And, the degree
of franchising (FR), measured by the number of franchise properties divided by the number
of total properties, is included, as it affects Tobin’s q combined with firm-specific
characteristics (Srinivasan, 2006).

3.4 Models and estimation methods

To examine the individual effect of geographic diversification and the moderating effect of
CEO duality on the geographic diversification–firm performance relationship, the current
study uses random effects regression. Moreover, to appropriately address the endogeneity
problem caused by a simultaneous relationship, this study adopts random effects regression
with the instrumental variable method. Two models for analyses are as below.

Tobin’s q ¼ a0 þ a1 GD þ a2 DUAL þ a3 SIZE þ a4 LEV þ a5 GO þ a6 INT þ a7 FR þ « ;

Tobin’s q ¼ a0 þ a1 GD þ a2 DUAL þ a3 GDxDUAL þ a4 SIZE þ a5 LEV

þ a6 GO þ a7 INT þ a8 FR þ « ;

For the coefficient estimation, when using panel data, the fixed effects or random effects
method should be used, as the pooled OLS estimation might be biased and inconsistent because
of an omitted variable bias caused by unobservable firm-specific and time-specific
 heterogeneities (Wooldridge, 2002). To decide whether to use the fixed effects method or Moderating
random effects method, this study conducted the Hausman test. As the difference between two effect of CEO
methods for coefficient estimations were insignificant, the random effects method was adopted.
Moreover, because the causality or endogeneity issue may exist in the relationship
duality
between geographic diversification and Tobin’s q (Kang and Lee, 2014), the two-stage least
squares estimator (2SLS) is used with the random effects model. That is, while we assume
that geographic diversification significantly affects firm performance in this study, a reverse
direction is also probable. Thus, biased and inconsistent estimations may engender because
of these kinds of causality problems and endogeneity issues (Campa and Kedia, 2002). This
study conducted the Durbin–Wu–Hausman test to detect endogeneity (Wooldridge, 2002).
As the results of the test showed the significant difference between the 2SLS estimation
method and the OLS estimation method (p-values of models are less than 0.05), this study
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adopted random effects regressions with the instrumental variable method to address the
endogeneity issues as much as possible.
In terms of 2SLS estimation, we regressed the independent variable on possible exogenous
variables containing instrumental variables to obtain fitted values in the first step. And then, a
coefficient is estimated by regressing the dependent variable on fitted values which are drawn
from the first step (Kang and Lee, 2014). Grounded on the diversification literature which used
2SLS regression, this study uses relevant instrumental variables not having a correlation with
errors but with geographic expansion for the first stage regression. To reflect macroeconomic
factors, we use GDP during the sample period. Additionally, as instrumental variables
representing specific characteristics in regards to geographic espansion, a stock exchange (EX),
SNP, firm size, profitability and growth opportunity within the sample period are used. To be
more specific, a stock exchange (EX) is assigned 1 if a firm is registered into AMEX, Nasdaq or
NYSE and 0 otherwise, which may facilitate diversification by reducing information
asymmetries and providing greater opportunities (Campa and Kedia, 2002). SNP is also
contained by assigning 1 when included in the S&P industrial index and 0 otherwise to explain
liquidity which possibly influences strategic decisions (e.g. geographic diversification). To
consider other firm-specific characteristics, average values of a firm’s size, profitability and
growth opportunity are adopted as instrumental variables.

4. Results
4.1 Descriptive statistics
Table I represents the results of descriptive statistics among variables. Tobin’s q ranges
from 0.010 to 3.313, having a sampled mean, 1.002. GD ranges from 0.401 to 0.959. As a
control variable, SIZE has a mean of 6.203, ranging from 0.030 to 10.187. LEV of the sampled
lodging firms has a mean of 0.530 and a standard deviation of0.275. GO, growth
opportunity, ranges from 0 to 13.450. INT has a mean of 0.116, ranging from 0 to 0.912. And,
FR shows a mean of 0.122 and a standard deviation of 0.222. Additionally, the current study
conducts a frequency analysis for CEO duality. Of 262 firm-year observations, while CEO
duality exists in 115 observations, the number of observations for Non-CEO duality
adoption is 147.
Table II provides the results of a Pearson’s correlation analysis of variables included in
regression analyses. GD correlates positively but insignificantly with firm performance,
Tobin’s q at the 5 per cent significance level. The moderating variable, CEO duality (DUAL)
and Tobin’s q, the dependent variable, are correlated negatively and insignificantly with
each other. The interaction term between GD and CEO duality (DUAL) shows an
insignificant correlation with Tobin’s q. A high positive and significant correlation between
the interaction term and the GD (r = 0.354) may be caused by the mathematical association
 IJCHM Variable N Mean SD Minimum Maximum

Tobin’s q 262 1.002 0.420 0.010 3.313

GD 262 0.784 0.143 0.401 0.959
SIZE 262 6.203 1.788 0.030 10.187
LEV 262 0.530 0.275 0.000 1.570
GO 262 0.352 1.046 0.000 13.450
INT 262 0.116 0.255 0.000 0.912
FR 262 0.122 0.222 0.000 0.982
Frequency
Variable N 1 0
DUAL 262 115 147

Notes: Tobin’s q = firm performance measured by market value to bookPvalue ratio; GD = the degree of
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geographic diversification measured by the Berry–Herfindahl index (1- Si2, where S is the number of
properties in each state divided by the number of total properties); SIZE = a firm’s size measured by the log
of total assets; LEV = a firm’s leverage measured by debt-to-asset ratio; GO = growth opportunity
measured by capital expenditure divided by sales; INT = the degree of internationalization measured by the
number of foreign properties divided by the number of total properties; FR = the degree of franchising
Table I. measured by the number of franchise properties divided by the number of total properties; DUAL = a
Summary of dummy variable, assigning 1 for the case in which a CEO also holds the position of the chairman of the
descriptive statistics† board of directors and 0 otherwise

Variable Tobin’s q GD DUAL GD  DUAL SIZE LEV GO INT FR

Tobin’s q 1.000
GD 0.076 1.000
DUAL 0.036 0.180 1.000
GD x DUAL 0.005 0.354 0.041 1.000
SIZE 0.209 0.472 0.267 0.127 1.000
LEV 0.210 0.321 0.164 0.142 0.316 1.000
GO 0.126 0.104 0.043 0.004 0.032 0.216 1.000
INT 0.244 0.037 0.153 0.008 0.454 0.300 0.104 1.000
FR 0.021 0.250 0.145 0.053 0.289 0.289 0.070 0.158 1.000

Notes: † and  denote the 5 and 1% significance level, respectively. Tobin’s q = firm performance
measured by market value to book P value ratio; GD = the degree of geographic diversification measured by
the Berry–Herfindahl index (1 Si2, where S is the number of properties in each state divided by the
number of total properties); DUAL = a dummy variable, assigning 1 for the case in which a CEO also holds
Table II. the position of the chairman of the board of directors and 0 otherwise; SIZE = a firm’s size measured by the
log of total assets; LEV = a firm’s leverage measured by debt-to-asset ratio; GO = growth opportunity
Summary of measured by capital expenditure divided by sales; INT = the degree of internationalization measured by the
Pearson’s number of foreign properties divided by the number of total properties; FR = the degree of franchising
correlations† measured by the number of franchise properties divided by the number of total properties

between the interaction term and GD. GD negatively and significantly associates with CEO
duality (DUAL) (r = 0.180). Among control variables, SIZE, LEV, GO and INT have a
positive and significant correlation with Tobin’s q at the 5 per cent significance level.

4.2 Main analysis and hypotheses testing

Table III provides the results of main analysis for Models (1) and (2). For both Models (1) and
(2), as the Durbin–Wu–Hausman test’s results indicate that significant endogeneity exist
 Estimation RE-2SLS (1) RE-2SLS (2)
Moderating
Variable Tobin’s q Tobin’s q effect of CEO
duality
GD 2.3828 (0.6176) 0.2809 (1.8369)
DUAL 0.0187 (0.0585) 0.0474 (0.0844)
GD  DUAL 6.0294 (3.0828)
SIZE 0.0446 (0.0305) 0.0290 (0.0623)
LEV 0.8969 (0.1313) 1.1142 (0.1780)
GO 0.0846 (0.0281) 0.1112 (0.0260)
INT 0.8425 (0.1539) 0.9356 (0.2735)
FR 0.1184 (0.1387) 0.1272 (0.2282)
Constant 1.1855 (0.4017) 0.0661 (1.1940)
Observations 262 262
Wald chi2 70.60 66.57
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Notes: † and  denote the 5 and 1% significance level, respectively. Standard errors are noted in
parentheses. RE-2SLS indicates random effects instrumental variable estimation; Tobin’s q = firm
performance measured by market value to bookP value ratio; GD = the degree of geographic diversification
measured by the Berry–Herfindahl index (1- Si2, where S is the number of properties in each state divided
by the number of total properties); DUAL = a dummy variable, assigning 1 for the case in which a CEO also
holds the position of the chairman of the board of directors and 0 otherwise; SIZE = a firm’s size measured Table III.
by the log of total assets; LEV = a firm’s leverage measured by debt-to-asset ratio; GO = growth
opportunity measured by capital expenditure divided by sales; INT = the degree of internationalization Summary of the
measured by the number of foreign properties divided by the number of total properties; FR = the degree of results from main
franchising measured by the number of franchise properties divided by the number of total properties analysis†

(p-value for Model (1) = 0.0002 and Model (2) = 0.0000), this study adopts random effects
instrumental variable (RE-IV) estimation to address the endogeneity problem that may
obscure the causality of the impact of geographic diversification on Tobin’s q. The result of
the main analysis for Model (1) supports H1 proposing that geographic diversification
positively and significantly affects firm performance (p-value = 0.000). Regarding control
variables, LEV, GO and INT seem to positively affect Tobin’s q, while SIZE and FR
negatively and insignificantly associate with Tobin’s q.
The result for Model (2) shows a positive and significant effect of the interaction term
(GD  DUAL) (p-value = 0.050), supporting H2. That is, the magnitude of the geographic
diversification’s impact on Tobin’s q is significantly greater when CEO duality exists. LEV,
GO and INT seem to have a positive and significant impact on firm performance, while SIZE
and FR show an insignificant association with Tobin’s q.

5. Discussion and conclusions

5.1 Conclusions
The main purpose of the current study is to examine the geographic diversification-firm
performance relationship in the US lodging industry in the corporate governance structure
context, using CEO duality as a moderator. Possible explanations exist regarding the
positive individual impact of geographic expansion. For example, operations of each
business unit in a particular geographic location, which are significantly difficult to retreat
because of substantial exit costs, tend to be highly vulnerable to idiosyncratic external
factors (e.g. regulations, seasonality, and natural environments) in each market. By
diversifying business units into multiple locations, a lodging firm may obtain relatively
stable returns by alleviating operational risks from volatile external factors in a particular
region, which may improve the overall firm performance in the end.
 IJCHM In addition, hotel properties tend to be concentrated in specific tourism destinations,
intensifying the rivalry among lodging firms in those regions (Basham and Kwon, 2009). In
this context, when a lodging firm expands business activities preemptively into strategically
important other locations and successfully establishes a dominant position, the firm can
obtain competitive advantage across overall geographic locations it engages in with
strengthened market power.
And, this study found a positive and significant moderating impact of CEO duality,
which implies that the influence of geographic diversification on Tobin’s q seems to be
significantly greater in the CEO duality structure than non-CEO duality structure.
Specifically, CEO duality supported by reinforced leadership facilitates communication
between managers and a board, which leads to the appropriate control of information
processing demands required for maximizing advantages from activity sharing and internal
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capital market operations among various geographic business units.

In addition, as CEO duality grants a unified authority for strategic decisions to CEO
(Iyengar and Zampelli, 2009), firms with CEO duality can expedite the entry into new
geographic markets and efficiently adapt to complicated external environments in those
locations with diverse culture, regulations, customers’ needs. Especially, lodging firms
which attempt to expand into strategically valuable locations under CEO duality can benefit
from more favorable, anti-competitive business environments. That is, intensified CEO’s
capabilities generated by CEO duality can accelerate communication and cooperation
among business units in different geographic locations for appropriating mutual
forbearance in the context of multipoint competition, which results in the reduction of
rivalry across overall geographic locations. Similarly, CEO duality enables a firm to more
easily take advantage of market power by facilitating cross-subsidization among diverse
business units with the successful deep-pockets model of predatory pricing (Barney and
Hesterly, 2008).

5.2 Theoretical implications

The current study attempts to examine the subject that has been scarcely dealt with in the
hospitality field (i.e. the moderating impact of CEO duality on the geographic expansion-
firm performance relationship). Accordingly, we expect to contribute to the hospitality
literature, offering a unique dimension that the impact of geographic expansion is
contingent on the CEO duality’s adoption, which is regarded as a core firm characteristic in
the corporate governance structure. Further, given that geographic diversification is a main
corporate-level strategy influenced by the relationship between managers and a board of
directors, this study enriches diversification theory by presenting empirical evidence that
CEO duality is a critical intervening factor that should be considered to be incorporated for
the comprehensive examination of the geographic expansion-firm performance relationship.
Specifically, the finding of the positive individual influence of geographic diversification
may support the portfolio theory, the market power view and the resource-based view,
implying that benefits from geographic diversification, including economies of scale,
economies of scope, market power advantage and risk reduction (Buckley and Strange, 2011;
Montgomery, 1994) exceed internal transaction costs and information processing burdens
incurred by geographic diversification (Jensen, 1986). This result is consistent with previous
studies’ empirical findings (Kang and Lee, 2014; Han et al., 1998; Deng and Elyasiani, 2008).
And, the result of the positive moderating impact of CEO duality supports stewardship
theory, arguing that CEO duality, compared to non-CEO duality, enables firms to more
properly alleviate costs and enlarge benefits from geographic diversification. That is, while
maximizing the efficiency from unity of command, CEO duality in the lodging industry can
 effectively reduce the coordination, motivation and monitoring costs incurred from a Moderating
complex organizational structure established to manage operations of a set of independent effect of CEO
properties in diverse locations (Brickley et al., 1996). Overall, this study clarifies and adds duality
values to relevant theories underpinning geographic diversification and CEO duality by
providing empirical evidences of the interaction effect between geographic diversification
and CEO duality. Especially, to accomplish this objective, the current study uses proper and
robust methodologies with practical data in the lodging industry, in which geographic
diversification and CEO duality are prevalently adopted with critical strategic implications.
When the findings of this study serve as a foothold for invigorating other future empirical
studies, related theories may be further clarified and improved (Peirce, 1997).
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5.3 Practical implications

Based on the results of this study, some practical implications are suggested. First, when a
lodging firm plans to implement geographic diversification, it is advisable to consider a
corporate governance structure incorporating CEO duality to maximize the effect of
geographic diversification on firm performance. Given that especially dynamic business
environments in the lodging industry, which tend to be shocked by exogenous factors
disparate in each geographic market, appropriate responsiveness to these uncertain
conditions afforded by CEO duality is desperately needed for a lodging firm.
Second, meanwhile CEO duality should be adopted with relevant justifications (e.g.
to minimize excessive vigilance of the board and send a sound signal to stakeholders).
For example, if CEO duality is implemented as a reward for the previous performance
of CEO as suggested by Kang and Zardkoohi (2005), not just motivated by other firms’
CEO duality practice or coerced by powerful CEO, then the firm can secure more
confident, unambiguous leadership from CEO duality, supported by a board of
directors and stakeholders. Further, managerial know-how and experience developed
and accumulated through geographic expansion under such assured CEO duality more
efficiently enriches core competency, the entire set of tacit knowledge, which is immune
to the duplication attempted by competitors, thereby leading to greater firm value with
sustainable competitive advantage.
Third, as CEO is a key decision-maker for conceiving and formulating corporate
strategies, a board of directors should ponder over qualifications and characteristics of CEO
candidates when nominating a new CEO of a firm. Given that a positive interaction effect
between CEO duality and geographic diversification on Tobin’s q exists according to this
study’s results, if new CEO possesses plentiful managerial know-hows and experiences
needed for operations in multiple markets, then it may magnify the positive moderating
effect of CEO duality. That is, a CEO taking a role of a chairman of the board with better
understandings of operations in multiple regions may generate more swift and appropriate
decisions while implementing geographic diversification, compared to a CEO with less
qualified experiences and capabilities.
Fourth, utilizing the study’s findings, potential investors and analysts engaging in the
lodging industry may consider CEO duality as a critical factor in scrutinizing investment
portfolios as well as other evaluation criteria. That is, when investors or analysts attempt to
conceive an investment portfolio incorporating lodging firms that actively implement
geographic diversification, the adoption of CEO duality can be one of core component and
basis in assessing lodging firms’ values and, in turn, making decision on which lodging
firms they include in the portfolio.
 IJCHM 6. Limitations and suggestions for future studies
This study has a limitation of the data availability. As this study uses secondary data
regarding financial performance, the degree of geographic diversification and CEO duality,
it includes only publicly traded US lodging firms in the sample, excluding privately held
lodging firms. In addition, as the sample of the current study only contains US lodging
firms, the generalization for applying the results of this study to other countries’ cases is
limited. Future studies that investigate the effect of geographic diversification in the CEO
duality context by including private lodging firms headquartered in foreign countries are
recommended to increase external validity. Additionally, to comprehensively examine the
geographic diversification–firm performance relationship, other intervening factors
representing unique characteristic of the lodging industry, such as market entry modes, a
brand portfolio and the degree of agglomeration need to be incorporated in future studies.
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Finally, by extending the results of this study adopting CEO duality as one of corporate
governance factors, future studies incorporating other corporate governance structure
related factors, including board independence and ownership structure may further enrich
geographic diversification and corporate governance theories.

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About the authors

Hyoung Ju Song is a Graduate Student at the College of Hotel and Tourism Management, Kyung Hee
University. Song’s research interests are corporate governance structure and strategic management,
such as corporate diversification, corporate social responsibility and strategic alliance in the
hospitality and tourism industry.
Kyung Ho Kang is currently an Assistant Professor at College of Hospitality and Tourism
Management, Kyung Hee University. Dr Kang’s research interests cover finance and strategic
management, including corporate social responsibility, corporate diversification and corporate
finance in the hospitality and tourism industry. Kyung Ho Kang is the corresponding author and can
be contacted at: khkang@khu.ac.kr

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