We implement the stress test methodology of the banking industry in conjunction with a Logit model of bankruptcy with parameters estimated with data from the Great Recession (2008–2013) to predict which firms would face financial distress among Spanish hospitality firms during 2020 due to the Covid-19 disaster. The predictions from both methods rely on the last accounting data available and on the expected revenue drop for 2020. Both methods coincide to predict that 25% of these firms will face a financial distress situation if revenues drop 60%. This forecast raises up to 32% of firms if revenues drop 80%. Financial distress will affect mainly small firms. Most of the firms in financial distress will face solvency problems, with total assets being insufficient to pay all debts.
The tourism industry is specially affected by health emergences (Chien & Law, 2003; Dahles & Susilowati, 2015; Dombey, 2003; Mckercher & Chon, 2004; Novelli, Gussing Burgess, Jones, & Ritchie, 2018). For example, in China, the SARS crisis in 2003 strongly affected the tourism industry compared to other industries (Dombey, 2003). The Covid-19 crisis is much stronger— not only for its effect on the tourism industry, reducing total activity by 60–80% in 2020 according to the United Nations World Tourism Organization (UNTWO), but also because it is widespread around the globe, collapsing the world economy. In Spain, where tourism’s relevance to the GDP is close to 15%,1 the overall impact to the economy is devastating. In such situations, recent studies are finding that the financial strength of firms is becoming especially relevant: stock market prices are less affected by the crisis in firms with more cash holdings, lower leverage and more profits (Acharya & Steffen, 2020; Ding, Levine, Lin, & Xie, 2020; Pagano, Wagner, & Zechner, 2020; Ramelli & Wagner, 2020). A natural interpretation of this finding is that investors do not expect financial markets to provide the financial resources firms will need to resist this crisis period (Ramelli & Wagner, 2020). The financial markets also predict this issue to be more relevant in industries where it is more problematic to maintain social distance measures, like in the hotel industry (Pagano et al., 2020).
In a stable or growing period, cash holdings are of little value since firms may easily access financial markets to obtain funds, when required. Furthermore, due to the agency conflict between managers and shareholders, cash holdings may generate negative incentives to executives and reduce shareholder value (Jensen, 1986). However, in the Covid-19 crisis stock market prices anticipate the difficulty many firms face to obtain the financial resources to survive this crisis period. Firms with low cash holdings, high financial leverage and with a history of low profits are at a disadvantage (Acharya & Steffen, 2020; Ramelli & Wagner, 2020). Past research in the hotel industry found that the financial structure of firms is irrelevant for the probability tourism firms’ survival (G´emar, Moniche, & Morales, 2016). Indeed, little attention has been paid to the financial strength of hospitality firms in past literature which studies their performance (Claver-Cort´es, Molina-Azorín, & Pereira-Moliner, 2006; Sainaghi, Phillips, & Zavarrone, 2017). Other characteristics of firms, such as the geographical location or the type of service attracted more attention (Assaf & Tsionas, 2018). However, a period with little revenues generates a strong need for financial resources in hospitality firms to survive and pay fixed costs, which are quite relevant in these firms (Nicolau, 2005). This situation could be easily solved in many firms if they had access to bank loans and/or financial markets operated properly, providing these firms with the needed financial resources to survive. This is something that changed in the Covid-19 crisis and that the previous literature on hospitality firms does not consider.