Capital Structure Decisions of Globally-Listed Shipping Companies

Abstract

Debt capital has traditionally been the most important source of external finance in the maritime industry. The access that shipping companies nowadays have to the international capital markets provides them with a broader range of financing instruments. As such, this study investigates the determinants of capital structure decisions using a sample of 115 exchange-listed shipping companies. We test whether listed shipping companies follow a target capital structure, and we analyze the dynamics of their capital structure adjustment subsequent to shocks in leverage. When compared with industrial firms from the G7 countries, listed shipping companies exhibit higher leverage ratios and higher financial risk. Standard capital structure variables exert a significant impact on the cross-sectional variation of leverage ratios in the shipping industry. Asset tangibility is positively related to corporate leverage, and its economic impact is more pronounced than in other industries. Moreover, profitability, asset risk, and operating leverage are inversely related to leverage. There is only weak evidence for market-timing behavior of shipping companies. Because demand and supply in the maritime industry are closely related to the macroeconomic environment, leverage behaves counter-cyclically. Applying a set of different dynamic panel estimators, we document that the speed of adjustment after leverage shocks is significantly lower during an economic recession. On average, however, the speed of adjustment in the maritime industry is higher compared with the G7 benchmark sample. These findings indicate that there are substantial costs of deviation from the target leverage ratio due to high expected costs of financial distress. Our results also have implications for corporate risk management activities.