An empirical framework to predict idiosyncratic risk in a time of crisis: Evidence from the restaurant industry

Nan Hua, Michael C. Dalbor, Seoki Lee, Priyanko Guchait

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Purpose – The purpose of this study is to invoke prospect theory to construct an empirical framework to predict idiosyncratic risk, and argue that when a firm performs better than its benchmarks, the firm tends to play safe by avoiding firm-specific risk to maintain its satisfactory performance level, but when a firm performs worse than its benchmarks, the firm may become aggressive with taking more risks to achieve an increased level of performance. Design/methodology/approach – This study tested the relationships between restaurant firms’ future idiosyncratic risk and the proposed firm financial characteristics. Heteroscedasticity- and autocorrelation-consistent (HAC) standard errors (Newey and West, 1994) were used to deal with potential problems of autocorrelations and heteroscedasticity. The standard error of residuals from the Fama-French three-factor model (Fama and French, 1993) was estimated to proxy for restaurant idiosyncratic risk. Findings – The main analysis reveals that five financial characteristics are significant predictors for restaurant firms’ future idiosyncratic risk in accordance with the proposed, negative relationship based on the prospect theory. Practical implications – Managers may predict their competitors’ future risk-taking behaviors using the current study’s findings, which will provide competitive advantage in a highly competitive business environment that we have now. Also, in practice, restaurant investors may consider findings of this study in forecasting future risks of their portfolio to help evaluate and revise their portfolios. Originality/value – First, this is a new endeavor of its kind dealing with the restaurant industry, filling the void in the literature in predicting the risk-taking behavior of restaurant firms in a time of crisis. Second, this study forms a prediction model that establishes “predictive causality” (Diebold, 2001) motivated by prospect theory. Third, building upon prior research, this study comprehensively examines relationships between the firm characteristics that capture firm-specific strategies (Ou and Penman, 1989) and the idiosyncratic risk that are “associated with firm-specific strategies” (Luo and Bhattacharya, 2009) in a restaurant setting. Finally, the findings of this study bear significant implications for practitioners and other parties of interest.

Original languageEnglish (US)
Pages (from-to)156-176
Number of pages21
JournalInternational Journal of Contemporary Hospitality Management
Volume28
Issue number1
DOIs
StatePublished - Jan 11 2016

Fingerprint

industry
autocorrelation
firm
Restaurant industry
Idiosyncratic risk
Restaurants
void
methodology
prediction
Prospect theory

All Science Journal Classification (ASJC) codes

  • Tourism, Leisure and Hospitality Management

Cite this

@article{21628d3dd4d44f1fb63dde1b52f0ec00,
title = "An empirical framework to predict idiosyncratic risk in a time of crisis: Evidence from the restaurant industry",
abstract = "Purpose – The purpose of this study is to invoke prospect theory to construct an empirical framework to predict idiosyncratic risk, and argue that when a firm performs better than its benchmarks, the firm tends to play safe by avoiding firm-specific risk to maintain its satisfactory performance level, but when a firm performs worse than its benchmarks, the firm may become aggressive with taking more risks to achieve an increased level of performance. Design/methodology/approach – This study tested the relationships between restaurant firms’ future idiosyncratic risk and the proposed firm financial characteristics. Heteroscedasticity- and autocorrelation-consistent (HAC) standard errors (Newey and West, 1994) were used to deal with potential problems of autocorrelations and heteroscedasticity. The standard error of residuals from the Fama-French three-factor model (Fama and French, 1993) was estimated to proxy for restaurant idiosyncratic risk. Findings – The main analysis reveals that five financial characteristics are significant predictors for restaurant firms’ future idiosyncratic risk in accordance with the proposed, negative relationship based on the prospect theory. Practical implications – Managers may predict their competitors’ future risk-taking behaviors using the current study’s findings, which will provide competitive advantage in a highly competitive business environment that we have now. Also, in practice, restaurant investors may consider findings of this study in forecasting future risks of their portfolio to help evaluate and revise their portfolios. Originality/value – First, this is a new endeavor of its kind dealing with the restaurant industry, filling the void in the literature in predicting the risk-taking behavior of restaurant firms in a time of crisis. Second, this study forms a prediction model that establishes “predictive causality” (Diebold, 2001) motivated by prospect theory. Third, building upon prior research, this study comprehensively examines relationships between the firm characteristics that capture firm-specific strategies (Ou and Penman, 1989) and the idiosyncratic risk that are “associated with firm-specific strategies” (Luo and Bhattacharya, 2009) in a restaurant setting. Finally, the findings of this study bear significant implications for practitioners and other parties of interest.",
author = "Nan Hua and Dalbor, {Michael C.} and Seoki Lee and Priyanko Guchait",
year = "2016",
month = "1",
day = "11",
doi = "10.1108/IJCHM-03-2014-0134",
language = "English (US)",
volume = "28",
pages = "156--176",
journal = "International Journal of Contemporary Hospitality Management",
issn = "0959-6119",
publisher = "Emerald Group Publishing Ltd.",
number = "1",

}

An empirical framework to predict idiosyncratic risk in a time of crisis : Evidence from the restaurant industry. / Hua, Nan; Dalbor, Michael C.; Lee, Seoki; Guchait, Priyanko.

In: International Journal of Contemporary Hospitality Management, Vol. 28, No. 1, 11.01.2016, p. 156-176.

Research output: Contribution to journalArticle

TY - JOUR

T1 - An empirical framework to predict idiosyncratic risk in a time of crisis

T2 - Evidence from the restaurant industry

AU - Hua, Nan

AU - Dalbor, Michael C.

AU - Lee, Seoki

AU - Guchait, Priyanko

PY - 2016/1/11

Y1 - 2016/1/11

N2 - Purpose – The purpose of this study is to invoke prospect theory to construct an empirical framework to predict idiosyncratic risk, and argue that when a firm performs better than its benchmarks, the firm tends to play safe by avoiding firm-specific risk to maintain its satisfactory performance level, but when a firm performs worse than its benchmarks, the firm may become aggressive with taking more risks to achieve an increased level of performance. Design/methodology/approach – This study tested the relationships between restaurant firms’ future idiosyncratic risk and the proposed firm financial characteristics. Heteroscedasticity- and autocorrelation-consistent (HAC) standard errors (Newey and West, 1994) were used to deal with potential problems of autocorrelations and heteroscedasticity. The standard error of residuals from the Fama-French three-factor model (Fama and French, 1993) was estimated to proxy for restaurant idiosyncratic risk. Findings – The main analysis reveals that five financial characteristics are significant predictors for restaurant firms’ future idiosyncratic risk in accordance with the proposed, negative relationship based on the prospect theory. Practical implications – Managers may predict their competitors’ future risk-taking behaviors using the current study’s findings, which will provide competitive advantage in a highly competitive business environment that we have now. Also, in practice, restaurant investors may consider findings of this study in forecasting future risks of their portfolio to help evaluate and revise their portfolios. Originality/value – First, this is a new endeavor of its kind dealing with the restaurant industry, filling the void in the literature in predicting the risk-taking behavior of restaurant firms in a time of crisis. Second, this study forms a prediction model that establishes “predictive causality” (Diebold, 2001) motivated by prospect theory. Third, building upon prior research, this study comprehensively examines relationships between the firm characteristics that capture firm-specific strategies (Ou and Penman, 1989) and the idiosyncratic risk that are “associated with firm-specific strategies” (Luo and Bhattacharya, 2009) in a restaurant setting. Finally, the findings of this study bear significant implications for practitioners and other parties of interest.

AB - Purpose – The purpose of this study is to invoke prospect theory to construct an empirical framework to predict idiosyncratic risk, and argue that when a firm performs better than its benchmarks, the firm tends to play safe by avoiding firm-specific risk to maintain its satisfactory performance level, but when a firm performs worse than its benchmarks, the firm may become aggressive with taking more risks to achieve an increased level of performance. Design/methodology/approach – This study tested the relationships between restaurant firms’ future idiosyncratic risk and the proposed firm financial characteristics. Heteroscedasticity- and autocorrelation-consistent (HAC) standard errors (Newey and West, 1994) were used to deal with potential problems of autocorrelations and heteroscedasticity. The standard error of residuals from the Fama-French three-factor model (Fama and French, 1993) was estimated to proxy for restaurant idiosyncratic risk. Findings – The main analysis reveals that five financial characteristics are significant predictors for restaurant firms’ future idiosyncratic risk in accordance with the proposed, negative relationship based on the prospect theory. Practical implications – Managers may predict their competitors’ future risk-taking behaviors using the current study’s findings, which will provide competitive advantage in a highly competitive business environment that we have now. Also, in practice, restaurant investors may consider findings of this study in forecasting future risks of their portfolio to help evaluate and revise their portfolios. Originality/value – First, this is a new endeavor of its kind dealing with the restaurant industry, filling the void in the literature in predicting the risk-taking behavior of restaurant firms in a time of crisis. Second, this study forms a prediction model that establishes “predictive causality” (Diebold, 2001) motivated by prospect theory. Third, building upon prior research, this study comprehensively examines relationships between the firm characteristics that capture firm-specific strategies (Ou and Penman, 1989) and the idiosyncratic risk that are “associated with firm-specific strategies” (Luo and Bhattacharya, 2009) in a restaurant setting. Finally, the findings of this study bear significant implications for practitioners and other parties of interest.

UR - http://www.scopus.com/inward/record.url?scp=84953263157&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84953263157&partnerID=8YFLogxK

U2 - 10.1108/IJCHM-03-2014-0134

DO - 10.1108/IJCHM-03-2014-0134

M3 - Article

AN - SCOPUS:84953263157

VL - 28

SP - 156

EP - 176

JO - International Journal of Contemporary Hospitality Management

JF - International Journal of Contemporary Hospitality Management

SN - 0959-6119

IS - 1

ER -