Geopolitical risk and shipping firms’ capital structure decisions in Belt and Road Initiative countries

ABSTRACT

Geopolitical uncertainty can disrupt global supply chains and increase frictional costs in international trade, thus affecting firm-level decisions. This study investigates the role of geopolitical risk (GPR) in the financial leverage choices of shipping firms from Belt and Road Initiative (BRI) countries and those from non-BRI countries. The current paper uses panel data methodology and considers 118 globally-listed shipping firms for the period 1987–2017. The results indicate that shipping firms lower their financial leverage as GPR rises. However, this negative effect is observed in shipping firms from BRI countries, but not in those from non-BRI countries. Moreover, the impact of GPR on BRI firms’ financing decisions is more than twice that of the global GPR. This result remains unchanged when the relevant macroeconomic factors are controlled. The negative effect of GPR on capital structure decisions is more pronounced during periods of high freight rates, high economic growth, and tranquillity. This study can serve as input for policy formulation to facilitate shipping firms operating in BRI countries.

KEYWORDS:

• Geopolitical risk
• Belt and Road Initiative
• capital structure
• maritime financial management
• shipping companies

Acknowledgements

The authors would like to thank Professor Paul Tae-Woo Lee, Professor Kamonchanok Suthiwartnarueput, Professor Di Zhang, Professor Zhongzehn Yang, and Professor Ming K Lim (the co-editor-in-chief), and two anonymous referees for their valuable comments and suggestions. The authors are grateful to Chaiyuth Padungsaksawasdi, also thanking Thira Chavarnakul (Chair Session), and participants at the 4th Belt and Road Initiative Conference (BRI 2019) in collaboration with the Asian Logistics Round Table (ALRT) hosted by Chulalongkorn University and Zhejiang University in Bangkok for helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 ‘Shipping firms’ refer to listed shipping firms in stock markets around the world.

2 Refer to Dai and Zhang (2019) for information on political uncertainty and finance.

3 ‘Shipping firms in BRI countries’ means shipping firms from the countries participating in BRI.

4 See PwC, 2018. The 21st Annual Global CEO Survey. Retrieved from website: https://www.pwc.com/gx/en/ceo-survey/2018/pwc-ceo-survey-report-2018.pdf

5 See Section 3.1 for more details on composition of GPR index.

6 Section 4.1 provides more detail on the different characteristics of shipping firms located in BRI and non-BRI countries.

Additional information

Funding

This study is supported by the Business Research Center of Thammasat Business School.