Leverage Decisions in the Norwegian Shipping Industry: An Assessment of the Determinants of Leverage, the Impact on Corporate Performance and Speed of Adjustment in the Norwegian Shipping Industry

Tyra Norevik & Marte Gulbrandsen

Student thesis: Master thesis


The shipping industry is largely dependent on external capital to finance its investments, and debt has historically been the most important source of external financing. However, during the last decade shipping companies have been provided with greater access to the open capital markets, allowing them to reach a wider range of financing options. Based on a sample of 16 publicly listed Norwegian shipping companies, this thesis aims to examine the determinants of capital structure decisions. In addition to this, we investigate if the Norwegian shipping companies exhibit a target leverage ratio, the effect of leverage on corporate performance and analyze the dynamics of speed of adjustment back to the target ratio.
In comparison to other industries, the shipping industry exhibits high leverage ratios. In addition to this, the Norwegian shipping industry has on average higher leverage ratios than the global shipping industry. Firm-level variables are discovered to have significant effect on the variation in leverage ratios in the Norwegian shipping industry. Asset tangibility has a positive relation to leverage and is concluded to be the most influential determinant. The market-to-book ratio and dividend payout exhibit an inverse relationship to leverage. As supply and demand fundamentals in the shipping industry is closely linked to macroeconomic conditions, the leverage ratio seems to behave countercyclically above the business cycle. The results indicate that the companies do not follow an explicit theory of optimal leverage ratio, but rather combine trade-off and pecking order in the attempt to achieve a target leverage ratio. The study finds little evidence for the market timing theory despite investors general perception on the opportunity to take advantage of the cyclical fluctuations.
The results indicate that leverage exhibits a significantly positive relation to corporate performance. Last, through the use of different panel estimators, the Norwegian shipping industry is observed to adjust more gradually back to the target leverage ratio subsequent to an economic recession than in an expansion. The lower speed of adjustment during recessions indicates that the cost associated with adjustment to target leverage is more expensive than the cost of deviation. The results are consistent with prior empirical research.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages118