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68
The Journal of Gambling Business and Economics (2011) Vol 5 No 1 pp 68-85
THE FINANCIAL RETURNS TO CASINO
AMENITIES
Lonnie L. Bryant
University of Tampa
Department of Finance
Douglas M. Walker*
College of Charleston
Department of Economics and
Finance
ABSTRACT
Casinos offer an increasing array of amenities (e.g., hotels, restaurants,
shows, shopping, and other entertainment). Yet, little information exists on
the financial returns to various amenities. We utilize financial returns and
casino company department revenue and expenditure data from 24 public
casino firms over 23 quarters (2004.1-2009.3) to analyze the returns on
investment from various casino amenities. Our findings indicate that
investments in expanding casino space and hotels have negative returns;
investment in food and beverage has a neutral impact; but investment in other
types of entertainment has a positive return.
JEL codes: G32, L83, D22
Keywords: Casino amenities; casino tourism; market structure; return-on-
assets
1 INTRODUCTION
Until the recession that began at the end of 2007, many observers had
regarded the casino industry in the United States, especially that in Las Vegas,
to be recession-proof (Hennessey, 2008). It seemed to be one of the few
tourism sectors not being harmed by the faltering economy. This has been
proven starkly wrong, as there was a steady revenue decline in U.S. casinos
from 2008 through mid-2010. Nationwide commercial casino revenues
dropped from US$34.1 billion in 2007 to $32.5 billion in 2008 and $30.7
billion in 2009. October 2009 revenues were down in Las Vegas for the 22nd
The authors gratefully acknowledge financial support for this project from the
Harrah Research Endowment.
* Corresponding author, Department of Economics and Finance, College of
Charleston, 5 Liberty Street, Charleston, SC 29401, USA. Email: WalkerD@cofc.edu
# The authors gratefully acknowledge financial support for this project from the
Harrah Research Endowment.
THE FINANCIAL RETURNS TO CASINO AMENITIES
69
straight month, declining to their lowest monthly total in the past six years
(KXNT, 2009). Atlantic City, NJ, saw its 2010 first quarter revenues continue
to decline compared to revenues in the first quarter of 2009 (Associated Press,
2010). However, some analysts have predicted that the casino market may
have bottomed-out in the first half of 2010 (Green, 2010). What was once
considered to be a stable and ever-growing industry has with the recent
recession been shown to have just as unstable foundation as most other
industries, if not more-so, as the casino industry specifically and tourism
generally rely on consumers’ discretionary spending.
As the casino industry continues to expand – despite the temporary
downturn – the mix of amenities offered at casino-based resorts also seems to
be changing. While the casino gambling used to be the major attraction, now
other amenities are as important – if not more important – as revenue sources
for casino resorts. This change in the casino resort landscape may be a
reaction to economic conditions, to increased competition, and other factors.
The purpose of this paper is to analyze this question: To what extent do
various amenities, such as hotels, restaurants and bars, shows, shopping malls,
and other entertainment, affect casino companies’ financial returns? More
specifically, an answer to this question would allow management and
investors to have a better understanding of which casino amenities tend to
increase firm performance, and which seem to diminish it. This information
would obviously be valuable as a piece of information to guide additional
investment in the firm’s assets. The results could also help inform
policymakers who often have to determine what types of casinos and
amenities are to be offered in new or expanded casino jurisdictions. Finally,
we believe our analysis of the U.S. casino industry could potentially be a
useful example for analysis of the industry in other markets or countries.
Using casino gaming as the base organization, we examine the
incremental impacts of combining casinos with hotels, restaurants, retail
outlets, and entertainment venues and/or environmental exhibits. It is
reasonable to believe that there are large differences between casino-only
facilities and those that offer all five types of amenities. Our analysis allows
for an assessment of whether and how the degree of diversification or synergy
among amenities in the gaming industry influences company performance.
2 CASINO INDUSTRY BACKGROUND
It is useful to begin an analysis by showing how the casino industry has
expanded in the U.S. since the early 1990s. Table 1 illustrates the legalization
and opening dates for commercial casinos in the U.S., and for 2007 (chosen
because it was prior to the recession), the number of commercial casinos
operating in each state, their total revenues, and the taxes they paid to state
governments. As is evident from the table, the casino industry is quite large in
the U.S. – it is among the largest of the tourism sectors and entertainment
industries.
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
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70
Table 1. Commercial casino market in the U.S., 2007
State
Year
Legalized
Date
Casino(s)
Opened
# Casinos
Operating in
2007
2007
Revenues
(millions $)
2007 Taxes
Paid
(millions $)
Colorado
1990
Oct. 1991
45
819
115
Illinois
1990
Sept. 1991
9
1983
834
Indiana
1993
Dec. 1995
11
2625
842
Iowa
1989
Apr. 1991
17
1363
315
Louisiana
1991
Oct. 1993
18
2566
559
Michigan
1996
July 1999
3
1335
366
Mississippi
1990
Aug. 1992
29
2891
350
Missouri
1993
May 1994
12
1592
417
Nevada
1931
1931
270a
12849
1034
New Jersey
1976
1978
11
4921
475
Pennsylvania
2004
Oct. 2007
6
1090
473
S. Dakota
1989
Nov. 1989
36
98
15
Totals
-
-
467
34132
5795
Source: AGA (2008) and Calcagno, Walker, and Jackson (2010).
a The Nevada casino count includes only casinos with gaming revenues over $1 million per year.
Las Vegas has always been the capital of casino gambling in the U.S.
Prior to the 1990s, the casino industry had an image characterized by “sin
city.” The industry was a cornerstone of adult entertainment, and attracted
relatively few families. But in the 1990s Las Vegas reinvented itself by
diversifying from its traditional model. Steve Wynn is often credited with
fundamentally transforming the industry with The Mirage hotel and casino.
This property represented one of the first that combined casino, hotel, fine
dining, and world-class shows. Many casinos that followed also followed the
“casino-based destination resort” model, and now the Las Vegas Strip is lined
with huge, expensive theme-based casino properties, many of which were
family-oriented. Binkley (2008) chronicles the managers that fundamentally
changed Las Vegas during the past two decades. For other perspectives on
Las Vegas, see Schwartz (2003) and Douglass & Raento (2004). Recently
there has been a swing back to the more traditional “sin-city” themes for new
Vegas casinos, as indicated in the city-wide advertising slogan, “What
happens in Vegas stays in Vegas,” as well as, for example, a new trend in
adult-only pools at many hotels. Casinos across the country often imitate the
trends set in Las Vegas.
Despite the continuing growth of commercial casinos in Las Vegas, the
rest of the U.S., and around the world, there has been one very interesting
trend that has accompanied the growth. Until the mid-1990s, certainly the
largest portion of casino revenues was derived from casino floor operations.
Typically hotel room and restaurant prices were held very low, with the
expectation that casino revenues would subsidize the other departments at the
casino resort. In some cases, hotel rooms and other amenities were “comped”
to the casino’s best customers. In such cases, revenue from the casino is
expected to offset expenses associated with comping the best customers.
However, beginning in the mid-1990s, a new trend emerged in which casino
THE FINANCIAL RETURNS TO CASINO AMENITIES
71
resorts became focused on offering a well-rounded menu of entertainment
options. This has continued, and now other, non-casino functions actually
generate more revenues than casino operations at many casino resorts. Indeed,
on the Las Vegas strip more than 60% of casino resort revenues are generated
from non-gaming amenities (AGA 2009, p. 7).
Many casino resorts now offer world-class entertainment, such as Cirque
de Soleil shows, famous musical acts, and even world-class art galleries.
Casino hotel room prices are generally significantly higher now than they
were through the mid-1990s, although recently they have declined some due
to the recession. The same is true of restaurant prices; Las Vegas
demonstrates this with its growing and wide array of famous-name, expensive
restaurants. In the early 1990s and before, one could get an all-you-can-eat
buffet for less than $10 at most casinos. Now many resorts in Las Vegas offer
buffets that cost over $30 per person. Although one could argue that the
quality of the hotels and restaurants has improved, justifying higher prices,
still, these non-casino components of casino resorts have undoubtedly become
increasingly important to casino industry profits.
The diversification of amenities at casino resorts seems to be the rule
since the mid-1990s; during this period, casino tourism has exploded across
the U.S. These developments beg the question: Has the introduction of new
amenities had a measurable impact on the performance of casino companies?
With the expansion of casinos into new jurisdictions, competition at the
national level has increased significantly. This competition for customer
spending raises the question of what casino amenities are most important to
offer casino patrons, and which best fuel profitability. In this paper we attempt
to answer these questions through an analysis of casino company return-on-
assets (ROA), as they relate to the volume of business accruing to the
departments of the typical destination casino resort: casino hotel, restaurant,
and other entertainment. We believe this to be the first study to rigorously
analyze this issue.
3 CASINO AMENITIES AND FINANCIAL RETURNS
3.1 Industry Structure
Casino games are inherently profitable, as the casinos do not pay the fair
odds on bets won by casino patrons. This is called the “house edge,” and
averages around 5% per dollar bet across all casino games. Casino games are
more or less identical across the U.S., in terms of the bets available and the
payoffs. For example, blackjack and craps games are more-or-less universal.
Slot machines do have different themes and variation in payout ratios.
Although minimum payouts are typically legislated, most casinos have pay-
out rates larger than the minimums allowed (Schwartz, 2010). As casinos
have expanded within existing markets and spread to new ones, casino
operators have adopted new strategies to attract customers. Our goal in this
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
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paper is to analyze which strategies appear to be more effective, as measured
in the firms’ returns, as revealed by ROA and changes in stock values.
There are two possible extreme organizational structures with respect to
amenities. Specialization would be a casino that focuses only on the casino
floor as the primary, if not only, attraction for customers. There are still some
casinos that have this strategy, even in Las Vegas. However, these properties
tend to be aimed toward local customers or those who are interested only in
gambling and no other types of entertainment. Specialization produces a
greater quality and/or variety of more specific products and services,
potentially increasing sales. Interestingly, the corporate mergers and
acquisitions literature suggests that diversifying acquisitions and ventures are
generally value-reducing, and that increases in corporate focus are value-
enhancing (e.g., Denis, Denis & Yost, 2002).
Yet, as the casino industry has expanded, it has clearly moved in the
opposite direction, toward a greater diversification of amenities. Such a
strategy arguably attract a larger customer base to a particular casino resort,
since with more amenities, a particular resort can satisfy a wider variety of
consumer preferences. Guier (1999) and Lucas & Brewer (2001) advocate the
full-service casino facilities, which include restaurants and entertainment
offerings, as a strategy to optimize property values because these amenities
are theorized to influence gaming volume. A specific example of this
diversification is discussed by d’Hauteserre (2000) in the case of the
Foxwoods Casino in Connecticut. By offering a greater variety of amenities,
casino management believes that the operating costs of having such offerings
are significantly less than the cash flow they provide to the casino. Yet, since
casino games are inherently profitable – the casino’s profit is a result of the
laws of probability – other amenities may be relatively risky, in terms of the
casino resort’s bottom line.
We should emphasize that when we discuss “diversification” in our
context, we are not referring to industry diversification as discussed in the
finance literature (e.g., Denis, Denis & Yost, 2002). For example, consider a
company like Altria, which owns the cigarette company Philip Morris, a wine
producing company, and an investment firm, among others. The casino
industry, on the other hand, is made up of corporations whose primary
investments are in the casino entertainment business. By “diversification” we
are simply referring to an increased variety of amenities at a particular casino-
based resort, among which there may be a synergy that is valuable to
consumers, and ultimately, to the firm and stockholders.
Efficiency, defined as a firm’s ability to utilize its resources in an
effective and productive manner, has been found to enhance shareholder
value. Efficiency may also be improved if increased diversification improves
the risk-return relationship. Thus, the “efficiency hypothesis” states that
multiple divisions increase shareholder value by investing in multiple
divisions and effectively managing the combination of amenities more
efficiently than they can be managed separately. It is an empirical question as
THE FINANCIAL RETURNS TO CASINO AMENITIES
73
whether or not the changes seen in the casino company structure –
diversification to new amenities – ultimately add value to shareholders. If it
does, it may be due in part to a synergy among the different resort department
functions, as has been found in other types of entertainment and tourism (e.g.,
Harrison-Hill & Chalip, 2005; Yuan, Cai, Morrison & Linton, 2005). The
different amenities together provide the customer with an array of options
which may result in more consumer spending overall. This should increase
firm performance.
Alternatively, one may think of the developing casino industry as a
national and even international market. Some casino companies, such as
Harrah’s (renamed Caesars Entertainment in late 2010) are known for the
quality of their customer loyalty program. Such programs may also be key in
the long-term performance of casino firms (Tasi, Cheung & Lo, 2010).
Although some studies have focused on an analysis of the customers or
tourists of casinos (Walker & Hinch, 2006; Park, Yang, Lee, Jang, &
Stokowski, 2002), our focus is purely on financial returns related to the
diversity of amenities.
Using casino gaming as the base organization, we examine the
incremental impacts of combining casinos with hotels, restaurants, retail
outlets, and entertainment venues and/or environmental exhibits. It is
reasonable to believe that there are large differences between casinos only
facilities and those that offer all five types of amenities. Our analysis allows
for an assessment of whether and how the degree of diversification in the
gaming industry influences firm performance. The specific question we
address is: Are there specific expenditures that have greater returns on
investment or increase the value of a particular combination of casino
amenities?
3.2 Study Methods
We wish to test how casino company returns data are affected by the
expenditures and revenues associated with the casino property amenities listed
above. There are several ways to measure firm-level performance. These
include return on investment (ROI), defined as net income divided by
common stock and preferred stock equity plus long-term debt; return on assets
(ROA), which is income for the period divided by assets; period return, or
changes in stock prices; and market capital. Our empirical analysis tests the
marginal impacts of different casino amenity revenues and expenditures on
two of these performance measures: ROA and period return (i.e., changes in
stock price).
We will focus our analysis and results on the former measure (ROA), as it
arguably a more accurate measure of casino company performance in our
context. ROA represents the asset utilization or the management’s efficient
use of assets (Burton, Lauridsen, & Obel, 2002). In this study we attempt to
identify the assets, in the form of amenities, that are efficiently used and
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
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increase shareholder value. Thus, ROA proxies for both the financial value
and the organizational asset utilization value of amenities in the casino
industry. In addition, the casino industry has been heavily leveraged in the
recent past, including during our sample period. As a result, focusing on the
ROA rather than ROI is arguably going to give us a better measure of the
valued added from amenities. For these reasons, in this model, ROA is a more
complete measure of industry performance.
Period return represents the stock market’s interpretation of the firm’s
value and performance, and as such, may be hyper-sensitive to current
economic events, politics, and a variety of other influences that have little to
do with the management practices of the casino industry and the market
conditions in which the industry operates. Yet, we still analyze the industry’s
period returns but put more emphasis on the ROA results.
We collected firm-specific data for publicly traded companies in the U.S.
with casinos as their primary business. Our data source for the casino
company stock and financial data is SNL Financial Interactive. There are 24
gaming firms included in the data set. The data are limited, running from the
first quarter of 2004 (2004.1) through the third quarter of 2009 (2009.3).
Table 2 lists the firms included in the analysis, their state of incorporation,
and web address.
Table 2. Casino firms and states of incorporation
Company Name
State
of Inc.
Web Address
American Wagering, Inc.
NV
www.americanwagering.com
Ameristar Casinos, Inc.
NV
www.ameristar.com
Archon Corporation
NV
Aztar Corporation
DE
www.aztar.com
Boyd Gaming Corporation
NV
www.boydgaming.com
Century Casinos, Inc.
DE
www.centurycasinos.com
Global Casinos, Inc.
UT
Harrah’s Entertainment, Inc.
DE
www.harrahs.com
Isle of Capri Casinos, Inc.
DE
www.islecorp.com
Kerzner International Limited
www.kerzner.com
Las Vegas Sands Corp.
NV
www.lasvegassands.com
MGM Mirage
DE
www.mgmmirage.com
Monarch Casino & Resort, Inc.
NV
www.monarchcasino.com
MTR Gaming Group, Inc.
DE
www.mtrgaming.com
Nevada Gold & Casinos, Inc.
NV
www.nevadagold.com
North American Gaming & Entertainment Corporation
DE
Penn National Gaming, Inc.
PA
www.pngaming.com
Pinnacle Entertainment, Inc.
DE
www.pnkinc.com
Riviera Holdings Corporation
NV
www.rivierahotel.com
Sands Regent
NV
www.sandsregency.com
Station Casinos, Inc.
NV
www.stationcasinos.com
Trans World Corporation
NV
www.transwc.com
Trump Entertainment Resorts, Inc.
DE
www.trumpcasinos.com
Wynn Resorts, Limited
NV
www.wynnresorts.com
THE FINANCIAL RETURNS TO CASINO AMENITIES
75
Although many of the companies included in our analysis were in
business prior to 2004.1, those earlier data contain too many zero observations
to be useful. One advantage of using the 2004.1-2009.3 sample period is that
few new U.S. casino markets were developed during this time frame.
Therefore, what expansion did occur in the casino industry did so in existing
states/markets. This is helpful because it is one less factor that must be
accounted for in our model.
We should emphasize that the short sample period is one limitation of our
analysis. Ideally, good industry data would be available further back. In part,
the richness of the current data is due to the transition from privately-owned
casino businesses, which dominated the industry through the early 1990s,
until corporate ownership became dominant. Nevertheless, we believe the
analysis contributes important information to the literature, despite its
relatively short sample period.
Table 3. Firm-level variablesa
Variable
Description
Revenues
Direct gaming
revenue earned from customer losses, net of house losses, at games
of chance and from wager-book activities
Hotel operation
revenues earned from the day-to-day room and service operations of
hotel properties
Food and beverage
revenues earned from the sale of food and beverage services
Other gaming
revenues not otherwise classified above that were earned in the
operations of hotel, resort, and casino gaming properties, including
businesses performed in conjunction with or otherwise directly related
to the operation of those properties
Interest
interest earned on loans and leases, and dividends earned in
investment securities, plus any deferred loan fees amortized into
income during the period (For companies under US-GAAP this is
computed in accordance with FAS 91.)
Partnership
net income from unconsolidated partnerships and joint ventures
Expenses
Direct gaming
expenses incurred in operations of games of chance and wager-book
activities. (Does not include house gaming losses, which are included
in net gaming revenue.)
Hotel operation
expense incurred from the day-to-day room and service operations of
hotel properties
Food and beverage
expenses incurred from the sale of food and beverage services
Other gaming
expenses incurred from the operations of hotel, resort, and casino
gaming properties, including businesses performed in conjunction with
or otherwise directly related to the operation of those properties
Interest
interest on debt and other borrowings, on an incurred basis; includes
the amortization of discount or premiums and interest on capital leases
Pre-opening and start-up
expenses incurred in the development of assets not yet producing
revenue
Other operating
operating expenses not otherwise classified above
Restructuring and merger
expenses incurred as the result of restructuring, mergers, and
acquisitions
a Provided by SNL Financial Interactive
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
2011, 5 1
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The data we collected for each company include: the identities of the
firms involved in the gaming industry; the state headquarters; the number of
facilities operated; the various amenities offered by facility; the primary four
digit SIC codes; the number of SIC codes in which the gaming firms
participate; and revenue and expenditure data by casino resort department
function. The primary financial variables are listed and defined in Table 3. In
Table 4 we report the annual mean values for these variables. (Our model uses
quarterly data, but we show annual data in the table for brevity.) All casino
company financial data were provided by SNL Financial Interactive.
There are three components to Table 4. Panel A lists the revenue sources
for the casino firms. Direct Gaming is revenue from the casino floor. The
hotel operations, food/beverage, and interest income variables are self-
explanatory. Other Gaming refers to any revenues earned by the casino
property not classified elsewhere in Table 4. Partnership income counts any
revenues from unconsolidated partnerships or joint ventures. Table 4 Panel B
shows the expenditure classifications for the casino companies. Many are the
same as for Panel A. Preopening and start-up refers to expenditures related to
properties yet to earn revenue. Other operating expenses include any
expenses that are not otherwise classified in Table 4 Panel B. The final
expenditure category is Restructuring, which relates to the fairly common
phenomenon of changes (mergers, etc.) to the industry’s market structure.
Overall, such restructuring expenditures are relatively small. Panel C of Table
4 lists measures of firm performance. (Readers unfamiliar with these return
variables can consult a finance textbook for a more detailed explanation.) We
choose two of these measures – ROA and stock share price – to use as the
dependent variables in our models because these variables yield the most
notable results.
As shown in Table 4, there is a considerable variation in the key variables
for the firms over time. For example, average total revenue consistently
increases from approximately $245 million in 2004 to a high of $434 million
in 2007. The recent recession has caused revenues to fall somewhat in 2008
and 2009. The total expenses increased from approximately $218 million in
2004 to almost $400 million in 2009. This long-term increase in both revenue
and expenses suggest that casinos were investing in growth and receiving
financial rewards from that investment. The recession that began in late 2007,
however, has certainly affected the industry.
The sizes of casinos have varied dramatically over the course of our
sample period. In 2004 the market capital was $1.7 billion, and it rose to a
high of $5.4 billion in 2007. Table 3 shows that this was followed by a steep
drop in market capitalization resulting in a market capitalization of just $1.9
billion. Table 3 shows that the evolution of the casino long-run performance
mimics the overall macroeconomic conditions in the U.S. and the broad stock
market trends; this is not surprising.
THE FINANCIAL RETURNS TO CASINO AMENITIES
77
Table 4. Summary statistics
Panel A: Revenue variables Year
(in thousands $)
2004
2005
2006
2007
2008
2009
Total
245,725
324,279
394,595
434,441
335,992
401,301
Direct gaming
187,780
225,471
286,901
319,452
248,772
288,988
Hotel operation
29,643
46,779
59,607
65,081
53,846
54,932
Food and
beverage
43,459
54,815
69,587
74,884
57,689
64,480
Other gaming
21,811
29,016
34,764
37,297
34,144
37,589
Interest
400
1,361
2,532
2,804
1,206
692
Partnership
3,259
3,994
4,842
3,950
1,342
(2,030)
Total capital
1,479,887
2,389,877
2,864,506
3,262,477
2,936,808
3,572,828
Panel B: Expense variables Year
(in thousands $)
2004
2005
2006
2007
2008
2009
Total
218,787
294,767
345,710
380,700
362,504
399,234
Direct gaming
89,785
107,433
136,489
156,841
132,860
152,606
Hotel operation
8,743
12,956
15,598
16,073
14,341
14,947
Food and
beverage
22,960
31,556
37,073
38,671
31,860
34,125
Other gaming
196,363
262,966
311,488
347,422
298,717
365,680
Interest
19,221
25,267
31,016
32,692
26,734
45,656
Pre-opening and
start-up
1,153
2,118
3,288
5,666
4,850
3,408
Other operating
15,806
20,256
20,453
21,004
24,676
24,115
Restructuring
927
(1,152)
897
115
(2,682)
582
Total assets
1,808,521
2,958,407
3,524,323
3,990,545
3,563,254
4,310,712
Total debt
1,022,199
1,617,072
2,010,253
2,293,982
2,148,420
2,640,104
Panel C: Profitability variables Year
(in thousands $,
except as noted)
2004
2005
2006
2007
2008
2009
Price per share (in
$)
20.29
29.15
33.42
37.54
16.28
8.83
Market capital
1,701,471
2,940,845
3,745,987
5,401,150
2,147,914
1,098,941
Period return
32.8%
2.9%
6.9%
1.9%
-25.9%
26.8%
Return on assets
134.2%
89.5%
102.6%
33.1%
1.7%
-53.1%
Return on
investment
12.3%
10.0%
14.1%
14.1%
-7.3%
0.5%
The estimated performance measures vary over the cross-sections of
casino companies and over time. In order to examine the returns to different
casino business amenities, we exploit the panel structure of the data. We wish
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
2011, 5 1
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to use the best industry data available – limited in scope and sample period as
it is – in order to best explain which casino amenities contribute most (or
least) to firm performance and value. We estimate variations on the following
ordinary least squares (OLS) models, one set with revenues as dependent
variables (equation 1), and the other with expenditure variables (equation 2):
(1)
(2)
In the equations Market Returnit is the performance measure for firm i in
quarter t. As noted above, we test both ROA and stock share price. Company-
level changes in expenditures and revenues from the various amenities, as
listed in Table 3, are the explanatory variables in the models (
2 through
7
and
2 through
8). Also included in all models are two macroeconomic
variables: the U.S. inflation-adjusted GDP and the national unemployment
rate. These are included in an attempt to detect any impact the
macroeconomic fluctuations in the U.S. economy may have had on the casino
industry during the sample period. As noted in the introduction, the casino
industry has clearly been negatively affected by general macroeconomic
conditions. The
1 and
1 are the constant terms, and
i is the error term. By
regressing the firms’ market returns on the various revenue and expenditure
categories related to casino amenities, we can isolate the marginal impact of
each type of amenity, at least at the company level. The changes in the
expenditures on and revenues from the various amenities are scaled by total
expenses or total revenues, respectively, to standardize the contribution of the
amenity on the firm’s performance.
3.3 Results
We run each of the models (shown in equations 1 and 2) with different
combinations of the explanatory variables, as shown in Tables 5 and 6. The
coefficients are presented with t-statistics in parentheses below. We tested
variants on each model; the results presented here provide the most significant
results. For the sake of brevity, we discuss the results in groups, based on the
general results for each variable across all tested models. We first examine the
THE FINANCIAL RETURNS TO CASINO AMENITIES
79
Table 5. Results: Dependent variable = return-on-assets (ROA)
Panel A: Revenues
(1)
(2)
(3)
(4)
(5)
Real GDP
0.0003
(2.29)**
0.0002
(1.70)*
0.0002
(1.67)*
0.0002
(1.68)*
0.0003
(2.92)***
Unemployment
0.8456
(4.92)***
0.4168
(2.76)***
0.3126
(2.19)**
0.4748
(3.60)***
0.7785
(5.53)***
Direct gaming revenue
0.1810
(5.74)***
0.1540
(5.55)***
0.1840
(7.92)***
0.1540
(5.52)***
Hotel operation revenue
0.1267
(1.07)
0.3417
(3.03)***
0.4251
(4.94)***
0.3257
(2.91)***
Food and beverage revenue
0.05759
(3.67)***
0.2437
(2.06)**
0.2255
(1.92)*
Other gaming revenue
0.0301
(0.24)
0.0854
(3.29)***
Interest income revenue
0.3555
(1.85)*
0.8990
(5.41)***
Partnership income
0.3701
(4.57)***
0.4121
(5.43)***
Constant
-49.4597
(-5.24)***
-33.2540
(3.92)***
-33.0587
(-4.22)***
-34.8978
(-4.15)***
-28.2515
(-3.61)***
Observations
258
321
369
317
372
Adjusted R-Squared
0.42
0.28
0.23
0.30
0.15
Panel B: Expenses
(1)
(2)
(3)
(4)
(5)
Real GDP
0.0001
(1.02)
0.0002
(1.52)
0.0002
(1.47)
0.0002
(1.69)*
0.0002
(2.16)*
Unemployment
0.4060
(2.38)**
0.4343
(2.60)***
0.3531
(2.39)***
0.3717
(2.49)**
0.3825
(2.99)***
Direct gaming expense
-0.2420
(-3.24)***
-0.1140
(-1.82)*
-0.0306
(-3.60)***
Hotel operation expense
-1.2434
(-2.96)***
-1.3014
(-3.22)***
-0.6629
(-2.59)***
-0.0508
(-1.98)**
Food and beverage expense
0.0606
(0.28)
0.1923
(0.89)
Other gaming expense
0.1554
(3.02)***
Interest expense
-0.1513
(-1.82)*
-0.0008
(-0.01)
-0.1298
(-2.24)**
-0.1660
(-3.30)***
Pre-opening and start-up
expense
-0.3136
(-1.85)*
-0.1010
(-0.70)
Other operating expense
-0.3336
(-2.82)***
Restructuring expense
0.1034
(2.90)***
0.1092
(3.41)***
0.1104
(3.39)***
0.1068
(3.83)***
Constant
-9.4495
(-0.97)
-13.3550
(-1.38)
-10.2661
(-1.28)
-12.9538
(-1.59)
-16.2308
(-2.31)**
Observations
331
334
386
386
444
Adjusted R-Squared
0.16
0.10
0.15
0.12
0.11
results for the ROA variable. These results are shown in Table 5. First
consider the revenue variables tested, the results of which are shown in Panel
A. Unsurprisingly, casino revenues have a large, statistically significant
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
2011, 5 1
80
positive impact on company performance. Similarly, in most models hotel
operations also contribute to firm returns, with the exception of the first model
(column 1). Food and beverage revenues were also statistically significant,
which may reflect the fact that restaurants have become a more significant
amenity at casinos during the past decade. The remaining industry variables
also show significance and positive impacts. The macroeconomic variables
are also significant; GDP has a direct relationship with casino firm returns,
which is not surprising. It suggests that casino gambling represents a “normal
good.” The statistically significant and positive impact of the unemployment
rate (in all models) is surprising, especially considering the industry’s
performance during the recent recession. Yet, this result suggests that casinos
perform better, ceteris paribus, when unemployment is increasing. Perhaps
this reflects a “desperation effect” that comes with a recession. For example,
recent reports (e.g., Morrison, 2010) indicate that $4.8 million in California
welfare program money has been withdrawn from casino ATMs since 2007.
Overall the revenue results suggest that casinos are still the largest contributor
to firm performance, while hotel and food/beverage operations both make
smaller contributions to firm performance.
In Panel B of Table 5, results are shown for the impact of expenditures on
amenities on the firms’ ROA. Oddly, expenditures related to direct gaming
have a large and negative impact on casino firm returns. This may suggest that
investments and renovations in casino floor space generally do not contribute
to firm performance. This makes sense if one considers that casino games are
more or less identical at different casino properties. Hotel operations are also
negative and significant in most models. This may indicate that there is a
saturation of hotel rooms in many casino markets. Las Vegas certainly
illustrates this fact after the recession’s impacts sunk in. However, food and
beverage expenditures have a positive impact on firm returns. We believe this
indicates that this amenity provides the ripest opportunity for expansion at
casino resorts – i.e., this is the amenity most likely to create a positive return
for the firm. The negative and significant results on interest expenses may
indicate that expansion (i.e., the incursion of debt and the associated interest
expenses) may not overall lead to higher firm returns. Consistent with that
result, Restructuring expense is negative and significant, indicating that the
large number of casino mergers in recent years may not have had a positive
impact on overall industry returns.
Overall, the equations on expenditures (Panel B) explain less of ROA than
the revenue equations do, as judged by the adjusted R-squares for the various
models. They range from 0.15 to 0.42 for the revenue models, but only 0.10 to
0.16 for the expenditure models. Although the explanations are more
straightforward for the relationships between revenue and return on assets
variables, arguably the expense models offer more insight into what types of
investments, with respect to casino amenities, yield positive returns for casino
owners.
THE FINANCIAL RETURNS TO CASINO AMENITIES
81
Table 6. Results: Dependent variable = Period return
Panel A: Revenues
(1)
(2)
(3)
(4)
(5)
Real GDP
0.0000
(2.74)***
0.0001
(3.24)***
0.0001
(5.06)***
0.0001
(3.47)***
0.0001
(5.11)***
Unemployment
-0.0506
(-2.72)***
-0.0558
(-3.36)***
-0.0556
(-3.48)***
-0.0430
(-2.70)***
-0.0538
(-3.47)***
Direct gaming revenue
0.00491
(1.25)
0.00384
(1.14)
0.00117
(0.42)
0.00445
(1.40)
Hotel operation revenue
0.0417
(3.01)***
0.0313
(2.37)***
0.0181
(1.80)*
0.0313
(2.56)**
Food and beverage
revenue
-0.0298
(-1.65)*
-0.0222
(-1.63)
-0.0232
(-1.85)*
Other gaming revenue
-0.0091
(-0.60)
0.0018
(0.68)
Interest income revenue
0.0211
(1.01)
0.0120
(0.66)
Partnership income
0.0029
(0.34)
0.0044
(0.51)
Constant
-3.3096
(-2.74)***
-3.4900
(-3.23)***
-5.0038
(-4.98)***
-3.5646
(-3.58)***
-4.7852
(-4.81)***
Observations
235
293
339
289
347
Adjusted R-Squared
0.16
0.12
0.13
0.12
0.12
Panel B: Expenses
(1)
(2)
(3)
(4)
(5)
Real GDP
0.0001
(3.63)***
0.0001
(3.24)***
0.0001
(4.24)***
0.0001
(4.69)***
0.0001
(4.96)***
Unemployment
-0.0329
(-2.05)**
-0.0495
(-3.01)***
-0.0539
(-3.59)***
-0.0515
(-3.32)***
-0.0512
(-3.74)***
Direct gaming expense
-0.00404
(-0.52)
-0.00474
(-0.69)
-0.00483
(-5.55)***
Hotel operation expense
0.0741
(1.65)*
0.0790
(1.71)*
0.0058
(1.13)
0.0251
(0.86)
Food and beverage
expense
-0.0369
(-1.67)*
-0.0488
(-2.09)**
Other gaming expense
0.0047
(0.86)
Interest expense
0.0014
(0.16)
0.0087
(1.13)
-0.0138
(-2.02)**
-0.0135
(-2.13)**
Pre-opening and start-up
expense
-0.0053
(-0.27)
-0.0074
(-0.01)
Other operating expense
-0.0039
(-0.34)
Restructuring expense
0.0037
(0.39)
0.0001
(0.01)
0.0021
(0.21)
0.0027
(0.47)
Constant
-3.7312
(-3.43)***
-3.2419
(-2.84)***
-3.5202
(-3.77)***
-4.1511
(-4.31)***
-3.816
(-4.47)***
Observations
304
307
356
356
413
Adjusted R-Squared
0.10
0.11
0.19
0.12
0.11
Next we re-run the model using period return (stock share price) as the
dependent variable. These results are presented in Table 6, and tell a
THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
2011, 5 1
82
somewhat different story than the results described above. First, we should
note that the unemployment variable is negative and significant. This suggests
that as unemployment rises, the stock market’s perception of casino firm
performance drops. This is consistent with the recent stark evidence that the
casino industry is not recession-proof, and is consistent with the general effect
of recessions on company stock values. Oddly, in these results, Direct gaming
revenue is insignificant in all models. Hotel operations, on the other hand,
shows a strong positive result in all models. Food and beverage shows a
negative, but only mildly significant, impact on returns. The expenditures
models indicate that higher direct gaming expenses lead to worse
performance. This seems reasonable, if it is interpreted as “comped” services
to customers. Of the amenities tested, only hotel operations were found to
have consistently positive results, although hotel operations expenses are
insignificant in two of the models.
3.4 Discussion
Our results are sensitive to which performance measure is used as the
dependent variables, as well as the explanatory variables included in the
model. Among the four models presented in Tables 5 and 6, we believe the
expenditure models (Panel B, Tables 5 and 6) to be the better ones. Revenue
from any department of the casino resort should be expected to contribute to
overall returns on assets, so positive coefficients on revenue variables are
hardly surprising. The expenditure models, in contrast, better represent
investments by casino management for the development of new or expanded
amenities. For this reason, we put more stock in the expenditure models,
generally. Among those, we believe that the ROA model is the more reliable,
in terms of offering information on how the different amenities impact actual
measured firm performance. Our results on expenditures in the ROA model
(Table 5, Panel B) are also most clearly consistent with anecdotal evidence
offered from the industry itself – diversification of amenities seems to have
been a primary engine behind the growth of the U.S. casino industry.
One final qualification of our results is that the varying results may
indicate that the effects of investments and revenues in different amenities
may vary across casino markets. For example, hotels may have a negative
return in the Las Vegas market, but might still have a positive impact in less-
developed casino markets. Other entertainment, such as bars and restaurants
and art galleries, for example, may be the primary mechanism by which
casino resorts in Las Vegas have differentiated themselves during the most
recent decade. Yet, in newer markets, such differentiation is not yet necessary
or value-enhancing, as the more basic components of expansion – investment
in casino space and hotel rooms – may be a wiser investment at this stage in
those markets’ development. Therefore, a useful extension to this analysis
would be a study of specific market, rather than industry-wide returns.
THE FINANCIAL RETURNS TO CASINO AMENITIES
83
The results have a number of implications for the casino industry and
policymakers. With respect to the industry management, obviously specific
firms have management teams whose jobs revolve around choosing optimal
strategies to maximize returns to stockholders. The analysis in this paper
provides information on how the industry has performed overall, but it does
not consider regional differences or firm-level differences other than
expenditures and revenues. However, the analysis may also be valuable to
policymakers, who must make important decisions on whether and to what
extent to allow casinos in their jurisdictions. As casino resorts are often
introduced with the goal of generating economic development, the results
from our analysis are relevant for explaining which amenities offered by
casinos appear to have a positive impact on firm performance. Better firm
performance would generally be expected to increase economic development
from casinos, at least in the short run (Walker & Jackson, 1998; Walker
2007).
4 CONCLUSION
In this study we have examined how revenues from and expenditures on
different types of casino resort amenities affect overall firm-level market
returns. We use data from 24 U.S.-based casino operators, from 2004 to 2009.
We test numerous variations on the models, and find that the results are
sensitive to the model specification. However, our best empirical evidence
suggests that amenities other than casino space have indeed made significant
contributions to firm performance. This is consistent with what has been
observed of the casino industry expansion during the past 20 years. Due to
increased competition, casinos have had to find a niche – they have had to
place themselves in a unique position in the market. Thus, amenities other
than the casino have started to have a larger impact on the overall
performance of the firm.
There are several limitations of this study, which we should emphasize.
First, we have a relatively short sample period. As more data become publicly
available, it would be useful to re-analyze the data in a follow-up study.
Second, one could argue that a better way to address the general question of
whether a more amenity-diverse casino industry performs better than an
“undiversified” one would be to do an analysis to compare the two industry
types. Unfortunately, the ability to perform such an analysis is limited by the
fact that most of the casino industry (worldwide) has developed into the
“destination resort casino” model; there are few flourishing markets that focus
their businesses solely on the casino floor.
As an extension to this study, it would be worthwhile to analyze property-
level data (i.e., using panel data by casino property by year). This would allow
a better understanding of the returns to different amenities in different market
conditions, different regions, etc. We believe this study provides a solid
foundation for future analyses of what amenities have contributed most to
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2011, 5 1
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casino firm returns. This information is obviously useful to industry
managers, analysts, investors, and policymakers, but it may also be useful to
casino and tourism researchers who wish to study the market structure of the
ever-growing casino industry, or wish to apply a similar analysis to the casino
industry in other countries.
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