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Publication Cash flow sensitivities in an asset-heavy industry: The case of shipping

Type

Working Paper

Institution(s)

University of Hamburg, HEC Montreal

Year

2015

Author(s)

Wolfgang Drobetz
Rebekka Haller
Iwan Meier

Research Area

Ship Finance, Corporate Finance

Keywords

Financial crisis, cash flow sensitivities, financial constraints, collateral channel, maritime financial management

Abstract

Shipping is an asset-heavy industry with cyclical cash flows and high financial as well as operating leverage. The recent financial crisis impinged heavily on the industry. Using a system of equations model, we analyze how cash flow shocks influence the financing and investment decisions of shipping firms in different economic environments. Even financially healthy firms felt strong negative effects on their financing activities during the recent crisis. In sharp contrast to other industries, these firms were nevertheless able to increase their long-term debt. Banks renounced to foreclose ships and sell at fire sale discounts to avoid industry-wide collateral channel effects. Unlike U.S. industrial firms and a matched sample of manufacturing firms, even during benign economic conditions, financially weak shipping firms invest suboptimally because of an inability to raise sufficient external capital. Financial constraints are most binding in long-term debt markets. The substitution between long- and short-term debt during the pre-2008 crisis periods shows that the composition of financing sources is more indicative of whether firms face financial constraints than the mere sizes of the financing-cash flow sensitivities. An analysis of firms’ excess cash holdings confirms the importance of financial flexibility.

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