William W. Lawrence

The purpose of this study was to find out how a hotel obtains financing for profit recovery from organizational decline. This was necessary because the relationship between capital structure and profitability is unclear in the literature. There is also ongoing debate about the type of debt needed for increasing profitability. A combination of qualitative and quantitative research methodologies was used. Historical case study revealed that the Jamaica Pegasus Hotel financed turnaround using working capital generated from sales growth. These internal funds were also sufficient to reduce an already low level of total debt over the turnaround cycle. Results from statistical analysis showed that the Hotel’s profitability was positively correlated with working capital, short-term debt and sales growth. These findings support pecking order theory of capital structure because the Hotel relied firstly on internal funds and then borrowed capital. However, the tenor of the debt matters. The findings contribute to theory by showing how pecking order theory enables granular application of the resource-based view to provide better understanding of hotel turnaround.