This paper examines the factor risk premiums of stock returns for the hospitality and tourism companies in New Zealand. The Arbitrage Pricing Theory (APT) approach is used to investigate the expected return for stock portfolio with respect to market, macro (i.e., money supply and discount rate), and tourism factor sensitivities. Monthly stock prices, market index, tourism, and macroeconomic data are used in the study. The results indicate that the risk premiums for international tourism demand and term premium (proxy for discount rate) are positively significant at the 5% level. A one unit increase in tourist arrival sensitivity would result in expected return increase of 10 to 17 percentage point. Similarly, a one unit increase in term premium can increase hospitality-tourism expected returns by 0.2 percentage point. However, the findings for the money supply factor are not significant. As the study shows that investors face high positive tourism demand risk, it is imperative for firms and policymakers in New Zealand to promote inbound tourism through effective marketing and management. This in turn can provide high expected returns and create shareholder value for investors. 1. Introduction Tourism is travel for recreational/leisure, visiting friends and relatives (VFR), or business purposes. It is vital for the global economy in terms of the production of goods and services, income, and employment generation in the service industries associated with tourism. The real average annual growth of world tourism exceeded the global economic growth during the period 2004–2007 [1]. In 2008 and 2009, international travel demand experienced a tremendous slowdown. Resurgence in international tourist arrivals was evidence of tourism recovery in 2010. Tourism contribution to total global GDP in 2011 was 9% or US$6 trillion [2]. The tourism industry comprises the full scale of businesses which range from large stock exchange listed corporations to small owner-operators. Hospitality business as defined by Hayes and Miller [3, page 5] is “an organization providing food, beverages, lodging, travel or entertainment services to people away from their homes.” As the goal of a company is to increase the value of the firm for its shareholders, investors often assess the performance of the firm based on their stock return and variability of return. The stock returns of individual companies and market are commonly used because they are regarded as good indicators of business activities and the data/information are easily available. Chen et al. [4] argued that variations in
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