In late 2008, the entire world economy faced the danger of recession as the American financial crisis expanded globally. The bulk of South Korea's large shipping companies as well as small and midium sized shipping comnpanies are confronted with worsening liquidity conditions as a result of global economic crisis.
All nations struggled to overcome the crisis. Also, Korean shipping companies struggled to overcome the world economy crisis.
The risk of shipping companies is even higher than that of other industries because it its very uncertain for them to obtain stable revenue and sustain their growth rate.
For example, after the global financial crisis, the oil prices have hit several records, and supply of vessels have increased due to the boom days of ocean industry for year of 2007 and 2008. A lot of shipping companies have decided aggressive investment decision for the boom days of ocean industry. However, the shipping companies which was made agreessive investment decisions for 2007 and 2008 were all in trouble after the world finincial crisis.
As a result, a lot of shipping companies went bankrupt for 2009 thru 2011.
The previous studies on the Korean shipping industry, especially shipping company, have emphasized financial characteristics in terms of debit ratio and sales risk. But if shipping industry has a high level of debit ratio and management risk than other industry, shipping companies must find the most fittable capital financing structure to reduce the risk on management.
The final results are founded by using a sample of 5 years audit report for 64 Korean shipping companies-year observations over 2007 thru 2011. also, previous books or documents have been referred to research the conventional theories as to the relationship between risk and return. Statistics analysis has been made based on the collected data to choose factors which influence shipping-related risk. T-test and multiple regression analysis have also been used to test relationship between risk and below mentioned factors:
Fluctuation of vessel volume(vessel variance), fluctuation of debt(debt variance), fluctuation of charter cost (charter cost variance), fluctuation of operation profits(operation profits variance), fluctuation of interest(interest variance) and fluctuation of cash flow(cash flow variance).
The study has set four hypotheses and research model to examine the shipping related risk factors and the relationship between shipping - related risk and those factors.
First, there are differences between management risks before and after financial crisis.
Second, industrial characteristics factors have an impact on management risk.
Third, company internal factors have an impact on management rsik.
Forth, environmental factors have an impact on management risk.
T-test has been conducted to verify a first hypothesis, and a first hypothesis has been adopted. Also, a third hypothesis has been adopted as a result of multiple regression analysis with a significance level less than 0,01.
However, second and forth hypotheses have been dismissed as a result of multiple regression analysis.
Finally, the results of this study hint that world finincal crisis greatly effects to Korean ocean-going shipping companies's management risks. Therefore Korean ocean-going shipping companies need conservative decision in preparation against possible shipping risk in their cash flow and in their vessel volum. because the future environment of ocean industry cannot be forseen.
Also, this study shows that Korean ocean-going shipping companies need to make effective use of vessel in a recession,
Operation leverage, ratio of operating profit to net sales have an influence on management risks differently while the world financial crisis.
Fixed assets to long-term capital ratio can be used as a representative signal index for economic downturn, and, ratio of value added and time interest earned are possible finincia ratio which can be used as a representative signal index for economic downturn. Total asset growth is also possible financial; ratio which can be used as a representative signal index for economic downturn.
This study contributed to find a method derivation to reducing management risks of Korean ocean-going shipping companies.
Also, this study shows that Korean ocean-going shipping companies need to establish a business strategy to increase the turnover of vessel.
In a recession, Korean ocean-going shipping companies need to take a strategy for profitability, and avoid finincial pressure for Korean ocean-going shipping companies, Government needs to keep tonnage tax system and give tax benefit to the companies.
Korean ocean-going shipping companies have to reduce their debt ratio and increase their equity capital ratio to avoid shipping risk; Charter related decision should be made reasonably and conservatively to manage the shipping-related risk; Vessel acquisition contract should reasonably be made in terms of interest; Management techniques and systematic provisions have to be prepared to avoid finincial risks while the economic downturn. Korean ocean-going shipping companies need to take strategy to keep the balance for assets and capital.
Therfore, Korean ocean-going shipping companies need an effort themself to reduce management risks, Government needs provide fully support to companies.