Asymmetries in the capital structure speed of adjustment: The idiosyncratic case of the maritime industry

Abstract

This study investigates asymmetries in the capital structure speed of adjustment in the case of a capital-intensive industry. Employing a sample of globally listed maritime, manufacturing and services firms between 1995 and 2020, we estimate a regime-switching partial adjustment model, to test whether the capital structure speed of adjustment depends on a firm’s positioning relative to the target. After accounting for the fractional, bounded nature of leverage ratios using a DPF estimator we document that maritime firms exhibit a higher (lower) speed of adjustment when they lie below (above) their target. Our empirical findings suggest that this asymmetric behavior holds across industries but is more profound in maritime firms emphasizing this industry’s particularity.

Keywords:

• capital structure
• speed of adjustment
• trade-off theory
• maritime industry
• service industry
• manufacturing industry

JEL classification:

• G32

PUBLIC INTEREST STATEMENT

In this study, we focus on the financing decision, i.e., how much debt to take, of maritime firms. We test the validity of the Trade-Off theory which suggests that firms reach an optimal capital structure by balancing the benefits of debt against its disadvantages. The benefit of debt results from the associated interest payments which reduce taxable income and consequently the amount of taxes due; the disadvantage of debt stems from increased costs of financial distress (i.e., higher cost of capital). We find that maritime firms do move towards a target debt ratio although at a more moderate pace than firms in the services and manufacturing sectors. Our findings improve our understanding of financial decisions of maritime companies and highlight their distinctiveness, specifically, i) the absence tax advantage of debt is trivial due to sector-specific tax regimes and ii) the comparatively higher amount of debt of maritime firms that impedes their ability to adjust to back to the target debt ratio when deviating from above.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See PricewaterhouseCoopers (2009) for a comprehensive guide on maritime tax regimes.

2. The Compustat Global Database starts in 1987, however a lot of observations are missing before 1995.

3. Author’s calculations using the Compustat Global securities. Market value of equity has been calculated as the stock price (year-end) multiplied by the number of common shares outstanding.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Ioannis Chasiotis

Ioannis Chasiotis is Adjunct Lecturer at the University of the Peloponnese, Greece. He holds a PhD in Finance and Accounting from Durham University Business School, UK. His research interests and output focus on capital structure, payout policy, capital investment and corporate governance.

Dimitrios Konstantios

Dimitrios Konstantios is Adjunct Lecturer at the University of Piraeus, Greece. He holds a PhD in Finance from the University of Piraeus. His current research lies in studying the relationship between innovation and finance. Moreover, his published work is in the area of Corporate Finance.

Vassilios-Christos Naoum

Vassilios-Christos Naoum is an Assistant Professor at the University of Piraeus. His main areas of research include Financial Accounting (Cash flows, Persistence, Earnings Management), Management Accounting (Cost Behaviour) και Intangibles (Intellectual Capital, Organization Capital). Vasilios-Christos has published in journals such as the European Accounting Review, Management Accounting Research, International Journal of Finance and Economics.