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Capital structure decisions, speed of adjustment and firm performance of listed shipping companies: New empirical evidence - Kapitalstruktur beslutninger, justeringshastighet og finansielt resultat av børsnoterte shipping selskaper: Ny empirisk bevis

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  • Title:
    Capital structure decisions, speed of adjustment and firm performance of listed shipping companies: New empirical evidence - Kapitalstruktur beslutninger, justeringshastighet og finansielt resultat av børsnoterte shipping selskaper: Ny empirisk bevis
  • Author: Aarland, Anders ; Fidjeland, Alexander
  • Description: This paper examines the factors that influence capital structure decisions, the relationship between capital structure and firm performance, and the speed of adjustment for the shipping industry. Shipping companies tend to have higher leverage ratios than other industries and therefore are exposed to higher financial risk. A set of traditional capital structure variables suggested by previous research were selected as possible determinants of capital structure. Our sample consists of 115 listed shipping companies for the period 1996-2016. We analyse the relationship between traditional capital structure variables and financial leverage, using ordinary least squares and fixed effects methods. For the speed of adjustment analysis, we have employed the following econometric techniques: ordinary least square, fixed effects, “difference” and “system” generalized method of moments, dynamic panel fraction and iterative bootstrap-based bias correction. Our regression results correspond with prior research. The traditional factors have a considerable effect on financial leverage. Yet the weight of each factor is different from other industries. Tangibility, profitability and asset risk are the most important firm specific factors for shipping companies. More tangible assets are associated with a higher leverage ratio, while increased profitability and asset risk predicts a lower level of leverage. Trade-off theory appears to be the most relevant theory, but this is not an absolute conclusion considering that profitability is also predicted by pecking order theory. Macroeconomic variables appear to only have a slight impact on capital structure decisions. The results indicate that financial leverage is counter-cyclical, and thus support pecking order theory. Our thesis also includes an analysis of whether leverage and the set of firm specific variables have an impact on financial firm performance. The results seem to vary depending on which firm performance measure was used. Tobin´s Q and return on sales support agency cost theory, whereas return on assets is inconsistent with the agency cost hypothesis. Finally, we review the dynamics of capital structure choices. Our results demonstrate that adjustment speeds for a reversion to target ratio are higher for shipping companies than for industrial firms. In periods of economic recession, speed of adjustment values are lower and confirm business cycle dependencies. The higher leverage ratios of the shipping industry furthermore mean that financial distress costs are likely to be severe when deviating from target.
  • Publisher: NTNU
  • Creation Date: 2018
  • Language: English
  • Source: NORA Norwegian Open Research Archives
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