The Asian Journal of Shipping and Logistics 33(2) (2017) 061-065

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The Asian Journal of Shipping and Logistics

Journal homepage: www.elsevier.com/locate/ajsl

Default Risk and Firm Value of Shipping & Logistics Firms in Korea *

Hyun Jung NAMa , Yo Han ANb

a
Research Professor, Dong-A University, Korea, E-mail:hjnam@donga.ac.kr (First Author)
b
Assistant Professor, Tongmyong University, Korea, E-mail:accahn@tu.ac.kr (Corresponding Author)

ARTICLE INFO ABSTRACT

Article history: As shipping and logistics industry is one of the core industries in Korea, the volume was ranked in
Received 30 November 2016
the fifth highest in the world. However, shipping and logistics industry of Korea has suffered from
Received in revised form 31 May 2017
Accepted 10 June 2017 default risk since Global Financial Crisis in 2008. This study examines the relationship between the
default risk, as measured by the Altman K-Score, and firm value, as measured by the Return on
Keywords: Assets (ROA), of shipping and logistics firms in Korea and compares the impact of default risk on
Altman K-Score firm value between good financial health firms and poor financial health firms. As the trends of K-
Default Risk Scores over a ten-year periods, shipping and logistics firms in Korea register weak-to-moderate
Firm Value
financial healthy rage. We find that Altman K-Score is significantly linked with firm value and also
Global Financial Crisis
Shipping and Logistics Industry higher performing firms as measured by the ROA exhibit higher financial health as measured by K-
Score. Although nine years have been passed since Global Financial Crisis 2008, Korean shipping
and logistics industry is still under the financial depression. This study proposes that systematic
financial alert system of Korean shipping and logistics industry should be required to decrease
default risk reflecting significance of Korean economy.

Copyright © 2017 The Korean Association of Shipping and Logistics, Inc. Production and hosting by
Elsevier B.V. T h i s i s a n o p e n a c c e s s a r t i c l e u n d e r t h e C C B Y - N C - N D l i c e n s e
(http://creativecommons.org/licenses/by-nc-nd/4.0/).

1. Introduction

As shipping and logistics industry is one of the core industries in Korea, companies of Korea such as STX PanOcean and Daehan Shipping were
the volume is ranked in the fifth highest in the world. However, shipping bankrupt due to severe financial problems caused by Global Financial
and logistics industry of Korea has heavily suffered from default risk Crisis and Hanjin shipping, the 7th biggest container shipping company in
since Global Financial Crisis in 2008. Specifically, major shipping the world was forced liquidated as of 2017. Likewise, Hyundai Merchant

* I would like to acknowledge Professor Jong-Khil Han (Editor in Chief) and Professor Jung-Sun Lee (Gyeongnam National University of Science & Technology)
for their supports to be published. I am also grateful to Kyung-Mee Lee (Master Student of Pusan National University) for her excellent assistance.
http://dx.doi.org/10.1016/j.ajsl.2017.06.003
2092-5212/© 2017 The Korean Association of Shipping and Logistics, Inc. Production and hosting by Elsevier B.V.
Peer review under responsibility of the Korean Association of Shipping and Logistics, Inc.
62 Default Risk and Firm Value of Shipping & Logistics Frims in Korea
Marine, the 12th biggest container shipping company in the world is being
under the liquidity crisis despite governmental supports.
This study examines the relationship between default risk as measured
by the Altman K-Score and firm value as measured by the Return on
Assets (ROA) of Korean shipping and logistics industry as well as
compares the impact of the default risk on the firm value between good
financial health firms and poor financial health firms.
This study expects to contribute the literature and practice on shipping
and logistics industry in several ways. First, this study investigates default
risk of Korean shipping and logistics industry. Even though Korean
shipping and logistics industry has been heavily affected by global
economic recession, very limited study examines default risk of Korean
shipping and logistics industry. Thus, this study provides empirical
evidence to support Korean shipping and logistics industry by analyzing
financial health and firm value. Second, most previous researches on
Korean shipping and logistics industry focus on firm performance,
investment activity, and competitiveness. In addition, previous researches
just focused on coastal shipping firms (Lee and Ahn, 1999) with short
sample period. However, this study examines whole Korean shipping and
logistics firms registered with the Korean Ship Owner’s Association
including both firms listed on the Korean Stock Exchange (KSE) and non-
listed firms for 10 years (2003 to 2012). This study provides
comprehensive results of financial status for Korean shipping and logistics
industry. Finally, this study proposes the necessity of financial alert
system for Korean shipping and logistics industry to control financial risk.
Although nine years have been passed since Global Financial Crisis 2008,
Korean shipping and logistics industry is still under the financial
depression. Accordingly, systematic management of Korean shipping and
logistics industry should be required to reflect significance of Korean
economy.
The reminder of this paper is organized as follows. Chapter 2 outlines
previous researches and proposes research questions. In Chapter 3, sample
selection procedure and research methodology will be addressed. The
empirical results are presented in Chapter 4. The summary of the research
and suggestions of further research will appear in Chapter 5.
2. Literature Review
The most population model of predicting going concern or default is
Altman Z-Score model using multiple discriminated analyses (MDA).
Altman Z-score model is appropriate for both public and private firms as
well as both manufacturer and service firms. The bankruptcy predictor of
Altman Z-Score combines several of the most significant variables in a
statistically derived combination. There are four categories of financial
ratios: Solvency, Coverage, Leverage, and Profitability. Solvency ratios
measure of the quality and adequacy of current assets to meet current
obligations as they come due. Coverage Ratios measure of the firm’s
ability to service debt. Leverage ratios measure of the vulnerability of a
firm to business downturns due to its leverage. Profitability ratios assist in
the evaluation of management performance. In 1996, Altman revised Z-
Score model to make it applicable for Korean firms called as K-Score
model. The expectation accuracy of default risk is 97.1% and 68.8%
before one year and five year of bankruptcy, respectively.
Kim, Yoon and Lee (2015) examine the influence of agency costs on
default risk in the construction industry using Altman’s K-Score. They
find the better asset utilization, the better stable financial structure for
default risk in construction industry. Ham and Seo (2012) test financial
soundness of advertising firms. The default risk measured as Altman’s Z-
Score of advertising firms reached to the highest in 2008, due to Global
Financial Crisis in 2008.
Kim (2014) investigates financial performance of Korean shipping and
logistics industry by conducting financial statement analysis. After Global
Financial Crisis 2008, its financial performance is significantly worse than
other industries.
Kim, Shin and Choi (2013) analyse the effect of tonnage tax on vessel
investment and find tonnage tax positively affects firm’s financial
performance and investment activities. Choi and Song (2010) provide
evidence that Korean shipping and logistics firms procure long-term debt
to avoid financial risk when they invest vessels due to high economy
fluctuation of shipping and logistics industry. Lee, Kim and Ahn (2013)
explore the relationship between Korean shipping and logistics firms’
investment and debt-ratio characteristics.
The result comes up with leverage is negatively associated with firm’s
investment. In addition, leverage is more sensitive to firm’s investment
during the economic recession while financial expenses to sales is more
linked with firm’s investment during an economic boom. In the whole,
shipping and logistics industry closely correspond to economic fluctuation,
thus Global Financial Crisis in 2008 will act as an important default risk
factor for Korean shipping and logistics industry.
3. Methodology
3.1. Sample
This study uses shipping and logistics firms registered in the Korean
Ship Owner’s Association. Financial statements data is obtained from
both DART (http://dart.fss.or.kr) provided by the Korean Financial
Supervisory Commission (KFSC) which is the equivalent to the SEC in
Korea and the Korean Ship Owner’s Association. The final sample
consists of panel data of 281 Korean shipping and logistics firms
including listed and non-listed firms and a total of 2,755 firm-year
observations over the ten-year periods (2003-2012). G
3.2. Measure of Variables
Even though Altman Z-score (1968) model is widely accepted in the
academic society to determine default risk, Altman Z-score model is not
suitable for this study. Forth variable (X4) of Altman Z-score score model
is only available for listed firm, but many Korean shipping firms are
unlisted on the Korean Stock Exchange. Thus, Altman Z-score (1968)
model cannot be applied to this study. Alternately, this study adopts
Altman’s K-Score model for Korean firms developed by Altman (1996) in
order to examine default risk of Korean shipping and logistics firms.
The Altman K-Score model is below.
K  Score 17.862  1.472 X 1  3.041 X 2  14.839 X 3  1.516 X 4
…...Equation (1)
where, X1 = Log (Total Assets)
X2 = Log (Total Sales/Total Assets)
X3 = Retained Earnings/Total Assets
X4 = Net Equity/Total Assets
According to Altman K-Score model, the firm is probably in strong
financial health when firm’s total score is higher than 0.75 whereas K-
score that is lower than -2.00 indicates poor financial health.
 Default Risk and Firm Value of Shipping & Logistics Frims in Korea 63

There are numerous measures of firm value. The Return on Assets
(hereinafter ROA) has prove to be extensively a robust and popular
measure of firm value (Doumpos et al., 2015). This study uses the
accounting performances of firm ROA as proxy of firm value. ROA is
calculated by operating income divided by total assets. Specifically
operating income was widely used to avoid the potential impact of non-
operating revenues and expenses, thereby reflecting firm’s real inherent
management activities.
This feature shows the financial health of Korean shipping and logistics
industry is close to weak moderate-to-healthy rage.
The financial health for Korean shipping and logistics industry has not
recovered from Global Financial Crisis in 2008 and requires a longer
recovery period arising from the Global Financial Crisis in 2008.

3.3. Empirical Model

This study addresses that the impact of default risk affects on firm value.
In order to test the usefulness of the Altman K-Score on firm value as
measured by ROA, a linear regression model between K-score model and
ROA is employed using following formula:

FirmValuei,t D 0  E1K T Scorei,t  E 2 LEVi,t  E3SIZEi,t  H i,t

…...Equation (2) Fig. 1. Trend of K-Scores over 10 years

FirmValue i ,t D 0  E1LD ( orHD )i ,t  E 2 LEV i ,t  E 3 SIZE i ,t  H i ,t
…...Equation (3)
where, for firm i and period t
Firm Value = Return on Assets (ROA)
K-Score = Altman’s K-Score calculated by Equation (1)
LD= dummy variable which takes a value of one if Altman’s K-Score is
higher than 0.75 and zero otherwise.
HD = dummy variable which takes a value of one if Altman’s K-Score is
lower than -2.00 and zero otherwise.
LEV = Leverage ratio as measured by book value of debt to book value of
equity
SIZE = natural log of total assets
The top and bottom 1% of the outliers are removed. As this study uses
panel data, panel data methodology should be employed. The Hausman
test and F-test are conducted to adopt suitable panel data analysis model
following Park and Medda (2015). In the Hausman test, the relevant F-
value of 6.23 on the unrestricted equation exceeds the critical F-value
1.668. Thus, for sample in this study, fixed effects estimation is applied to
suitable model for panel data.GG
Table 1 shows descriptive statistics for firm value, default risk and other
control variables. First of all, mean and median of K-Score are -0.706 and
-0.320, respectively. For Korean shipping and logistics industry, the
overall K-Score for its mean and median are in the weak moderate-to-
healthy rage. The mean and median of ROA as a proxy of firm value are -
0.523 (7.968) and 0.054 (0.538), respectively.
Theses scores are relatively lower than whole Korean industry in the
similar period which is 0.014 (An, 2015). It shows low financial
performance of Korean shipping and logistics industry. Furthermore, the
outstanding feature of Korean shipping and logistics industry is financial
leverage ratio (LEV) with mean (median) value of 3.757 (2.796). It means
Korean shipping and logistics industry has a significantly high level of
dependence on debt, compared with whole Korean industry with both
mean (0.546) and median value (0.495) (An, 2015).
Table 1
Descriptive Statistics of Variables
 ROA K-Score LEV SIZE
Mean -0.523 -0.678 3.757 10.736

4. Empirical Results Median 0.054 -0.320 2.796 10.527

Max 0.642 10.955 363.360 15.930

4.1. Descriptive Statistics
Min -304.000 -51.411 -1540.667 1.099
Figure 1 presents the trends of mean and median K-Scores for Korean
shipping and logistics industry from 2003 to 2012. Std. Dev. 13.386 6.100 72.511 1.806
As per Altman (1996), K-Score that is higher than 0.75 indicates good
financial health whereas K-Score lower than -2.00 might be default in High leverage ratio of Korean shipping and logistics industry can be
sight. The mean value of K-Score of Korean shipping and logistics explained by two reasons. First reason is mandatory introduction of the
industry fell in tandem to their lowest point since around 2007 during the IFRS (International Financial Reporting Standards) for Korea since 2010.
Global Financial Crisis in 2008 and 2009. It rebounded in 2010 for a According to the IFRS, ship chartering is classified into capital lease not
while but again significantly fell in the period 2011. Subsequently, the operating lease. The leverage ratio of Korean shipping and logistics
increases in 2012 were the lowest before the Global Financial Crisis in industry under the IFRS increase because capital lease of ship chartering
2008. In all of the ten years, the range of mean K-Score is from -4.853 to is considered as firm’s liability. Second reason is high financial distress
1.127 and median scores range from -2.918 to 3.378. Only one year out of for Korean shipping and logistics industry due to global economic
whole sample periods, the mean K-score exceeds the 0.75 higher recession. Since the Global Financial Crisis in 2008, world freight volume
benchmark whereas it exceeds the -2.00 lower benchmark in three years. has been on a downturn, thereby increasing financial leverage ratio for
Korean shipping and logistics industry.
64 Default Risk and Firm Value of Shipping & Logistics Frims in Korea

4.2. Correlation 2.00 (low financial health firms).

In Table 4, the coefficients of LD on ROA is 0.0528 (0.0524) and
In table 2, Pearson Correlation among firm value, default risk and other statistically significant at 0.01 levels for both pooled-OLS and fixed
control variables. Firm value (ROA) is significantly positively correlated effects estimation. This result shows that good financial health firm has
with K-Score. It means that K-Score as a proxy of default risk is a positive high firm value. It directly support that strong and positive significant
function of the firm value. K-Score is strongly negative with financial relationship between low default risk and high firm value may be
leverage ratio while positively significant with firm size (SIZE). This construed as a positive signal for shareholders, various stakeholders and
correlation presents firm with high leverage ratio and small size is more investors in Korean shipping and logistics industry. Financial leverage
exposed to default risk. This study confirms multicollinearity among ratio (LEV) is negatively related to firm value (ROA) with statistical
independent variables using variance inflation factor (VIF). As a result, significance at 0.01 levels while firm size (SIZE) is positively significant
multicollinearity is not found because VIF of all variables has below 10. with ROA. High financial leverage imposes severely heavy financial
distress, thereby decreasing firm value. In this study, mean value of the
Table 2 KSE listed firms’ K-Score is 2.019 whereas that of non-listed firms’ K-
Pearson Correlation
Score is -0.884. It explains that non-listed firms are much more exposed
Variables ROA K-Score LEV SIZE to default risk than listed firms. Thus, positive relation between SIZE and
ROA can be explained by lower default risk of listed firms than that of
ROA 1.000
non-listed firms.
K-Score 0.079*** 1.000 The coefficients of HD on ROA (-0.0554 and -0.0567) is negative and
*** statistically significant at 0.01 levels in both pooled-OLS and fixed effects
LEV -0.010 -0.031*** 1.000
estimation. Hence, this result provides a direct support to the prediction
*** **
SIZE 0.035 0.426 -0.013 1.000 that high default risk negatively affects firm value.
On the whole, the empirical results indicate that higher performing firms
VIF 1.16 1.09 1.18 1.42
as measured by the ROA exhibit higher financial health as measured by
Note: *p<0.10, **p<0.05, ***p<0.01
K-Score as well as there is a significant statistical relationship between
4.3. Empirical Results firm value and financial health.

Table 4
Table 3 provides the results whether K-Score model affects the firm
The Effect of K-Score on Firm Value between degrees of default risk
value. Total 2,755 observations were used for the regression of Korean
shipping and logistics firms. The coefficients of default risk (K-Score) on Pooled FixedG PooledG FixedG
G G
firm value (ROA) are 0.0412 and 0.0443 with statistical significance at OLSG EffectsG OLSG EffectsG

0.01 levels in both pooled-OLS and fixed-effect estimates model. These Variables ROAG ROAG VariablesG ROAG ROAG

results support that there is a significant statistical relationship between LDG 0.0518*** 0.0524*** HDG -0.0554*** -0.0567***G
default risk and firm value. Overall, the Altman K-Score model is able to LEVG -0.0747** -0.0548** LEVG -0.0479* -0.0555*G
use as a classification criteria of default risk on Korean shipping and SIZEG 0.074 **
0.072 G **
SIZEG 0.0615 G *
0.0605*G
logistics industry. Constant 0.119 ***
0.117 ***
ConstantG ***
0.150 G 0.149***G
2 2
Adj R 0.342 0.560 Adj R 0.418 0.651
Table 3 F-StatG 5.706*** 2.348*** F-StatG 7.025***G 2.752***G
The Effect of K-Score on Firm Value F-testG 42.96***G F-testG 41.68***G
Hausman Hausman
Pooled-OLS Fixed-Effects 5.84***G 5.22***G
test testG
Variables ROA ROA
Note: *p<0.10, **p<0.05, ***p<0.01
K-Score 0.0412*** 0.0443***
LEV -0.0340* -0.0506* 5. Conclusion
**
SIZE 0.0617 0.0638**
Constant 0.132*** 0.135*** This study examines whether the K-Score model proposed by Altman
2
Adj R 0.290 0.624 (1996) is useful for Korean shipping and logistics firms’ default risk
F-Stat 5.855*** 2.631*** criteria through the empirical test of K-Score on the firm value. This study
F-test 43.76 ***
develops the research question by comparing the firm value between good
Hausman test 6.23*** financial health and poor financial health using panel data set of 2,755
* ** *** observations during ten year period (2003-2012). This study finds that the
Note: p<0.10, p<0.05, p<0.01
K-Score model is significantly positive relationship with firm value
(ROA). This result indicates that K-Score has usefulness to measure as a
In addition, this study estimates primary model separately for the firms
default risk criteria on Korean shipping and logistics industry. Thus, this
with low default risk (LD) and firms with high default risk (HD) using
relationship might be construed as a positive assurance for various
dummy variables. In K-Score model, 0.75 and -2.00 are the critical value
stakeholders, in Korean shipping and logistics industry. In addition this
of default risk. Thus, this study classifies firms into two categories: 1) low
study separately tests for the firms with lower default risk (K-Score>0.75)
default risk firms (LD) if K-Score is greater than 0.75 (good financial
versus the firms with higher default risk (K-Score<-2.00). The results
health firms) and 2) high default risk firms (HD) if K-Score is lower than -
directly support that lower default risk increases firm value vice versa.
 Default Risk and Firm Value of Shipping & Logistics Frims in Korea 65

On the whole, this study contributes to the literature providing important
evidence to test the impact of default risk on firm value for Korean
shipping and logistics industry. Moreover, it is also meaningful to classify
the sample between low default risk and high default risk firms. To the
practice, this study provides the implication of government policy maker.
Although nine years have been passed since Global Financial Crisis in
2008, Korean shipping and logistics industry is still under the financial
depression. However, there are very limited financial database and
financial alert system for Korean shipping and logistics industry.
Accordingly, systematic management control system of Korean shipping
and logistics industry should be required to the stakeholders such as
government and financial institutes to decrease default risk reflecting
significance of Korean economy. In conclusion, Altman K-score analysis
is well proved to be effective for testing default risk of shipping and
logistics industry in Korea as a result of this study. The importance of this
study is the empirical result to demonstrate that the shipping and logistics
industry in Korea is facing the default risk. Hence, shipping and logistics
firm in Korea have to reduce default risk to maintain sustainability as well
as Korean government and financial institutes have to control financial
health of the firms periodically because default risk reduces the firm value.
Finally, several related issues left for further study. First, testing of the
default forecast can be employed by using firms having experienced
financial failure. Financial failure might be better proxy for default
classification because the use of financial failure more enhances the
impact of default risk on firm value. Second, the changes of bond rating
instead of K-Score can be used as a measure of default risk. The changes
of bond rating can provide another insight of observing the impact of
default risk on the firm value.
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