Corporate financial leverage and M&As choices: Evidence from the shipping industry. (January 2020)

• Record Type: Journal Article
• Authors: Alexandridis, George; Antypas, Nikolaos; Gulnur, Arman; Visvikis, Ilias
• Is Part Of: Transportation research. Volume 133(2020)
• Publication Date: 2020-01
• Subjects: Mergers and acquisitions -- Shipping industry -- Financial leverage -- Financial management -- Capital structure; Logistics -- Periodicals; Transportation -- Periodicals; 388.011
• DOI: 10.1016/j.tre.2019.101828
• Languages: English
• ISSNs: 1366-5545

Abstract

Highlights: We examine the impact of financial leverage on corporate investment outcomes in the shipping industry. Deviations from abnormal leverage affect the likelihood of undertaking acquisition investments. Deviations from abnormal leverage are also linked to deal size and financing mode. Overleveraged firms make better acquisition decisions. Abstract: High capital intensity and reliance on debt financing are among the most prominent characteristics of the shipping industry. The corporate finance literature has documented that beyond a certain threshold, leverage can hamper a firm's ability to raise capital, and as a result, have a bearing on its corporate investment policy. The new, more restrictive, financing landscape in the shipping sector has put the management of capital structure on the spotlight as a key driver of investment policy, financial health, and thus, firm success. In this paper, we examine for the first time the link between the financing policy of shipping companies and their corporate investment decisions. We focus on the impact of deviations from target capital structure on mergers and acquisitions (M&A); an increasingly important corporate growth vehicle for shipping companies, with directly measurable outcomes. Deviations from optimal leverage display a strong association with the likelihood to consummate acquisitions, deal size, the financing method as well as the M&A outcome. Higher debt levels are shown to have a negative effect on acquisitiveness and a positive effect on the quality of corporate investment; a pattern with direct policy implications for shipping companies, their management teams, and shareholders.