Capital Structure in the Shipping Industry : An Analysis of Leverage and Asset Volatility in Publicly Traded Shipping Companies

Abstract

This research paper provides a comprehensive analysis of the optimal leverage in the shipping industry, focusing on the influence of asset volatility on static and dynamic capital structure decisions. Under static model conditions with fixed bankruptcy costs, the optimal leverage ratio is determined to be 47%. However, when including additional costs such as call premiums and debt issuance costs in the dynamic model, this ratio adjusts to 43%. Our research is based on a sample of 167 shipping companies over a period between 2010 and 2022. The companies are primarily based on the global SIC code 44, which includes companies within waterborne transport. Additionally, we include firms operating large vessels that may not solely focus on shipping and exclude companies focusing on harborand port management and passenger- and cruise ship operations. The study provides insights into leveraging practices and highlights the impact of market perceptions of risk on capital structure decisions in the shipping sector. The results have practical implications for shipping companies looking to optimize their capital structure and enhance their financial performance. The findings indicate that increased asset volatility raises a shipping company’s value at default. Using comparative static and dynamic models, the study finds that higher asset volatility lowers leverage ratios among shipping companies. A 1% increase in asset volatility suggests that the market leverage ratio for a shipping company decreases by 2.8%. Furthermore, when the freight rates increase, the earnings follow, leading to a decrease in leverage due to higher valuations in the market. This suggests that the shipping industry relies more on using excess cash to fund its investments during booms rather than issuing debt.