Corporate Cash Holdings in the Shipping Industry
A study of the corporate cash holdings of listed shipping companies reveals that they hold more cash than similar firms in other asset-heavy industries.
Cash holdings are undeniably of great importance to the strategic decisions of shipping companies, as large, cash-financed acquisitions in the sector in recent years demonstrate.
The extant literature has identified various reasons why corporations generally hold cash. For example, by using cash to make payments, firms can save on transaction costs associated with having to liquidate assets. Firms can avoid the costs of raising external financing by using their own internal cash funds. They may also hold reserve cash as a precautionary move against the risk of future cash shortfalls: firms which operate in industries where average cash flow volatility is higher tend to hold more liquid assets.
The study Corporate Cash Holdings in the Shipping Industry extends the empirical evidence on corporate cash holdings by analysing the level and value of cash holdings of shipping companies.
A sample of 144 globally listed shipping companies was compiled and then compared with a matched sample of manufacturing companies. Overall, shipping companies were found to hold up to three times more cash than their matched manufacturer peers in almost every year of the sample period.
The study suggests that shipping firms value an additional dollar of cash higher than matched manufacturing firms, regardless of their financial constraints status, but depending on the cyclicality of their expansion opportunities and on their cultural background.
Consistent with the cyclical nature of the shipping industry, shipping firms with less procyclical expansion opportunities attribute a higher value to cash holdings, especially when the external capital supply is scarce. In this context, cash serves as a corporate hedging device. The availability of cash provides a cushion that protects firms from underinvestment and aids the increasing of market share during downturns. In particular, a firm may build up a “war chest” to ensure it can acquire rival companies or vessels at fire sale prices during periods of industry weakness. This is a significant motive, since asset play creates the opportunity for significant profits that may compensate for lacklustre margins present in the freight market.
On the other hand, the cyclicality of expansion opportunities was not found to have an impact on the value of cash in good times, as firms can obtain funding from external sources more easily.
Another observation is that shipping companies exhibit a higher marginal value of cash when they originate from a country with lower individualism and higher uncertainty avoidance scores. This can be explained by the more concentrated ownership found amongst shipping companies, which implies that the largest shareholder’s cultural traits wield a strong influence on corporate decision making.
Finally, raising external capital became more difficult for shipping companies during the straitened period following the Global Financial Crisis, as banks’ borrowing facilities for asset-based lending shrank as a result of stricter regulation. This challenging environment may offer an additional explanation for the comparatively conservative manner in which shipping companies manage their cash holdings.
The accepted version of the paper Corporate Cash Holdings in the Shipping Industry is available for download at the link below. The final paper was published in Transportation Research Part E: Logistics and Transportation Review.