Geopolitical risk and shipping firms’ capital structure decisions in Belt and Road Initiative countries

Abstract

ABSTRACT Geopolitical uncertainty can disrupt global supply chains and increase frictional costs in international trade, thus affecting firm-level decisions. This study investigates the role of geopolitical risk (GPR) in the financial leverage choices of shipping firms from Belt and Road Initiative (BRI) countries and those from non-BRI countries. The current paper uses panel data methodology and considers 118 globally-listed shipping firms for the period 1987–2017. The results indicate that shipping firms lower their financial leverage as GPR rises. However, this negative effect is observed in shipping firms from BRI countries, but not in those from non-BRI countries. Moreover, the impact of GPR on BRI firms’ financing decisions is more than twice that of the global GPR. This result remains unchanged when the relevant macroeconomic factors are controlled. The negative effect of GPR on capital structure decisions is more pronounced during periods of high freight rates, high economic growth, and tranquillity. This study can serve as input for policy formulation to facilitate shipping firms operating in BRI countries.