Capital structure in bulk shipping: An assessment of the determining factors of capital structure and Its effect on performance in the bulk shipping industry

Peter Wohlstrand & Jørgen Jebsen Marek

Student thesis: Master thesis


Executive Summary: This thesis examines the capital structure of listed bulk shipping companies. The competitive environment in the bulk shipping industry can best be described as perfect competition and the distinct supply and demand relationship within the industry causes profitability to fluctuate dramatically. Due to the competitive situation the long run profitability is low and since retained earnings provide an insufficient source of financing when acquiring new vessels, the industry relies heavily on debt. Due to the combination of low profitability, high capital intensity and large fluctuations in the bulk shipping industry the allocation of debt and equity may be essential for firm performance. In order to examine the determining factors of capital structure and its effect on performance an extensive study is conducted, comprising interviews with key industry executives as well as a comprehensive quantitative study utilizing a unique dataset of 69 bulk shipping firms. Unlike previous academic research the quantitative study has emerged on the basis of the qualitative study, which subsequently is used to assess the quantitative results in relation to the bulk shipping industry. From an academic point of view the pecking order theory, where debt is preferred to external equity, appears superior at explaining the financing behaviour in the bulk shipping industry. More specifically, the access to bank funding is a driving factor of capital structure, as companies’ demand for bank financing often exceeds the supply. Besides the access to capital, companies’ credibility and their exposure to the spot market are found to be the most important determining factors of capital structure. Although many market participants highlight that ownership structure affects leverage, the quantitative study is unable to provide conclusive results. Lastly, it is likely that psychological biases such as overconfidence, over-optimism and herd behaviour inflate leverage. In regards to capital structure’s effect on performance, the analysis strongly suggests that the leverage ratio in the bulk shipping industry is sub-optimal and that companies with a relatively low leverage ratio compared to the industry, outperform their peers. The qualitative study indicates that bulk shipping companies try to achieve a high return on equity by using leverage, but fail to adjust for the increased downside risk during market peaks. Accordingly, it can be concluded that the bulk shipping industry may be able to create value by being more financially disciplined.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages134