Transport Policy 143 (2023) 1–9

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Transport Policy
journal homepage: www.elsevier.com/locate/tranpol

Container ship investment Decisions–Newbuilding vs second-hand vessels

Lixian Fan a, Ziyan Li a, Jiaqi Xie a, Jingbo Yin b, *
a
School of Management, Shanghai University, 599 Shangda Rd., Shanghai, 200444, China
b
State Key Laboratory of Ocean Engineering, School of Naval Architecture, Ocean and Civil Engineering, Shanghai Jiao Tong University, 800 Dongchuan RD., Shanghai,
200240, China

A R T I C L E I N F O A B S T R A C T

Keywords: Ship investment is a crucial strategic issue for shipping companies as the container shipping industry is highly
Ship investment capital-intensive. In practice, a company’s ship investment decision mainly concerns new shipbuilding and
Container ship second-hand vessels. The investment of new container ships with advanced technology is high in cost and the
Ship type choice
payback period is long. Differently, the second-hand vessels’ investment cycle is shorter, but there are certain
Nested logit model
drawbacks in loading capacity and maintenance. Therefore, it is significant to investigate the investment se­
lection of new-building and second-hand ships in the container shipping market. Previous studies have analyzed
this topic at aggregate or industry level. Few studies have attempted to reveal ship type preferences from
observed individual data. Therefore, using the data from the Clarkson’s World Fleet Register between 2000 and
2021, this study employs the Nested Logit model to analyze the container ship investment preferences, and
explore the impact of different variables on decision-making from the perspective of individual companies. The
empirical results suggest the higher substitution effect among alternatives within the same nest than that of
crossing nests. Along with discussion on the effects of various factors, it discloses the higher preferences of larger
types of vessels in responding to competitors’ capacity expansion, especially the larger companies. Therefore, it is
important to distinguish the larger companies’ capacity expansion between responding to demand and
competing with competitors, especially for those companies adopting follower strategies.

1. Introduction The benefit of investment is directly related to the future development of

The sustainable development of international shipping industry is of
great significance to the prosperity of world trade by connecting various
countries and regions in the world. According to the United Nations
Conference on Trade and Development’s annual report, more than four-
fifths of the merchandise trade in the world is carried out by sea, which
underlines the importance of shipping (UNCTAD, 2021). The container
market has become the development direction of the international
shipping industry since the structure of containers was standardized in
the late 1960s to early 1970s. The speed and efficiency of maritime
transportation have been dramatically increased because of the stan­
dardization (Sahara and Watanabe, 2011).
In the shipping transportation market, ships are the main carriers
and the most basic production tools to provide transport services.
Therefore, the ship investment decision is a crucial strategic issue for
shipping companies to participate in market operations. Enterprises
control the ownership or management rights of ships through invest­
ment and realize the supply of shipping capacity to the shipping market.
shipping companies. Because of the high-value of vessels, the shipping
industry is a capital-intensive and high-risk industry. The value of
container ships is much higher than that of ordinary dry bulk carriers.
For example, a new container vessel above 8000 TEU costs approxi­
mately 89 million dollars (UNCTAD, 2021). Inappropriate investment
may influence not only the shipping industry itself but also the enter­
prises that depend on global shipping companies (Fan and Luo, 2013).
So, every investment in ships will have a dramatically significant impact
on shipping companies.
In practice, a company’s ship investment decision mainly concerns
new shipbuildings and second-hand ships. Fig. 1 shows the number of
new contracts and second-hand sales from 1996 to 2021. Generally, the
investment of new container ships is high in cost and the payback period
is long and the shipbuilding prices are constantly changing with the
fluctuation of the shipping market. Consequently, the validity of the
company’s shipbuilding investment decisions is often related to the
success or failure of the entire enterprise (Yu, 2012). Differently, the
second-hand container ships’ investment cycle is shorter. When the

* Corresponding author.
E-mail address: jingboyin@sjtu.edu.cn (J. Yin).

https://doi.org/10.1016/j.tranpol.2023.09.005
Received 14 July 2022; Received in revised form 2 August 2023; Accepted 6 September 2023
Available online 9 September 2023
0967-070X/© 2023 Elsevier Ltd. All rights reserved.
L. Fan et al.
capacity structure needs to be adjusted, second-hand container ships can
be traded much faster, but it is not easy to obtain preferential conditions
of loans or subsidies when buying, and the financing channels are nar­
row. Meanwhile, there are certain drawbacks in loading capacity, main
engine power and fuel consumption, maintenance, repair, inspection
and insurance costs, even relating to environmental problems or acci­
dents. In practice, the observed ship type choice distribution in Fig. 1 is
actually the result of various factors. Therefore, it is significant to
investigate the marginal effects of different factors on the investment
selection of new-built and second-hand container ships using observed
preference data.
In addition to considering the economic benefits of new and second-
hand ships, shipping companies have speeded up their efforts to cope
with the growing concerns of international carbon emissions, trying to
reduce the unit transportation cost of containers, increase economies of
scale, and enhance the competitiveness of enterprises in the market. So,
they have accelerated the pace of large-scale container vessel deploy­
ment. But is the larger the container ship, the more favorable it is for the
enterprise?
Based on this background, this study analyses various factors
impacting shipping companies’ investment decisions in the interna­
tional container market, and further investigates shipping companies’
preference for different kinds of new and second-hand container ships to
explore future development trends of shipping companies’ investment
decisions and help companies better understand the different impacts of
different environmental changes on decision-making. This study uses
new ship contract and second-hand ship transaction data from the
Clarksons World Fleet Register (WFR) from January 2000 to December
2021. By reviewing related literature, factors that affect investment
decisions are summarized and the influence of the factors on the choice
of ship types is analyzed through empirical model estimation.
The contribution of this study to the understanding of container ship
investment includes: First, since the investment strategy of a business is
a significant component of its business decision, factors representing its
market conditions and its competitors’ expansion strategies are taken
into consideration in addition to the market and operational variables.
Second, it uses Nested Logit regression models to analyze the investment
choice behavior, which discloses the general investment choice decision
follows a hierarchical or sequential process. i.e., deciding on new or
second-hand first, then on the specific ship size. Third, it reveals the
actual choice preferences of individual ships, which is different from
previous studies using aggregated time series. Therefore, the results can
Fig. 1. Number of new and second-hand ships invested.
Source: Clarkson’s Shipping Intelligence Network (SIN)
2
Transport Policy 143 (2023) 1–9
help shipping companies and other related companies better understand
the shipping market, make reasonable investment strategic decisions,
and strengthen container shipping market participants’ competitive­
ness, ensure operating income, and effectively prevent operating risks.
The remaining parts of this study are arranged as follows: Section 2
gives a review of related researches about shipping investment. Section
3 introduces the data source, variable descriptions, and the logit model.
The empirical results and discussion are described in Section 4, and
Section 5 concludes.
2. Literature review
Because of its important role in the shipping industry, ship invest­
ment has attracted much attention. This study mainly reviews the
literature from three aspects: (1) methods used for ship investment; (2)
factors impacting investment; (3) analysis of ship type and size choice
behavior.
(1) Methods used for ship investment
Reviewing previous investment analysis in the shipping market, Net
Present Value (NPV), Real Option Approach (ROA), Fuzzy Analytic Hi­
erarchy Process (FAHP), time series methods and cost-benefit scenario
analysis are popularly adopted.
Since the 1980s, stakeholders tended to use financial indicators to
determine ship investment. Among them, NPV is a typical financial in­
dicator for evaluating the economic benefits of investing in new ships
introduced by Sloggett (1984). Afterwards, to make plans more in line
with business interests, various decision-making theories and methods
were employed in practice. Kou and Luo (2018) pointed out that NPV
and ROA could be combined to calculate and decide whether to invest
ships or not. They analyzed ship investment behavior based on the
future freight earnings, following a mean reverting stochastic process. In
addition, some studies investigated the priorities during ship acquisi­
tions (Park et al., 2018) and the asset management (Bulut et al., 2012)
utilizing FAHP method.
Another school in the literature is adopting time series analysis
methods to investigate the factors impacting ship investment or ship
price. Alizadeh and Nomikos (2007) identified the long-run cointegra­
tion relationship between bulk ship price and earnings and which can be
used as an indicator of investment or divestment timing decisions.
Similarly, Merikas et al. (2008) investigated the investment activities in
L. Fan et al.
the tanker market using error-correction models. They found that vessel
costs did not impact investment decisions between new or old vessels,
but the ratios between the two could. Dai et al. (2015) analyzed the
determinants of newbuilding price volatility using the GARCH model
and identified freight rate volatility as the key influencing factor.
Greenwood and Hanson (2015) discussed the relationship between ship
earnings and ship price and disclosed that high earnings are associated
with high second-hand prices and which heightens ship investment. It
also pointed out that shipping companies over extrapolate exogenous
demand shocks and partially neglect the endogenous investment
response of competitors. Illuminated by this, this study incorporates the
factors relating to companies and their competitors’ status into invest­
ment decisions.
Above studies provided valuable insights into ship investment de­
cisions. However, the methods adopted by those studies typically
require some specific assumptions or assuming certain scenarios for
companies or shipping lines, or relying on expert opinions. Different
with them, this study utilizes discrete choice models to find out the ship
investment behavior and the ship preference of companies from
observed individual ship investment data. A major advantage of
adopting observed data is that it is free from the bias that is a common
problem when using survey data.
(2) Factors impacting ship investment
When it comes to the investment influencing factors, Marlow (1991)
has written a series about ship investment in the shipping industry. The
factors such as market conditions, freight rates, changes in cost, and flag
registration were taken into consideration besides traditional factors
that determine investment behavior. Engelen et al. (2006) claimed that
investment behavior is influenced by rate levels as well. Before investing
in ships, Bessler et al. (2008) suggested that a full understanding of
freight rates is required. Xu et al. (2011) showed that the volume of trade
(ship demand), the size of the fleet (fleet size), and the share of supply
services (location advantage) can determine the ship investment deci­
sion. A study conducted by Lee et al. (2014) considered factors
impacting the shipping competitiveness of a country and different policy
effects on shipping.
Considering the findings of these studies, the empirical model in­
cludes an appraisal of shipbuilding location, market demand and freight
rate. Since an investment strategy plays a significant role in a company’s
investment decision, this study also considers the factors that represent a
company’s market condition and its competitors’ expansion strategies.
(3) Analysis of ship type and size choice behavior
Along with the development of shipbuilding technologies, larger
container ships have become more and more common in operation to
achieve optimum economies of scale. But larger ships do not necessarily
maximize the profits of companies. Before 1970s, the optimal ship size
was considered to be the largest one that can fit in the port (Heaver,
1968; Van de Voorde, 2005). Later, Jansson and Shneerson (1982)
explored the optimal ship size and found that different ship size should
be deployed according to the cargo quantity and length of the routes.
Generally, larger vessels are used for deep-sea shipping while smaller
ones focus on short-sea routes. Meanwhile, ship sizes and operations are
closely related due to the power of economies of scale according to Sys
et al. (2008), and this has promotes the appearance of “Triple E-class”
ships and the successive vessels larger than 23,000 TEU. However,
benefits are not entirely proportional to the ship size as Lian et al. (2019)
claimed that the optimal ship type is not the largest container in
existence.
It can be seen from the above analysis that previous scholars have
studied ship investment and ship type selection issues from different
perspectives. However, few studies have attempted to reveal the ship
investment behavior using observational data. Capacity expansion and
3
Transport Policy 143 (2023) 1–9
ship type choice are two important decisions for shipping companies’
development and operation. Because of the complexity of the shipping
industry, this problem is difficult to solve. Based on the research of
newbuilding and second-hand ship investment choices, this study uses
the Nested Logit model to conduct an empirical analysis of the ship types
of global new and second-hand ship investments from January 2000 to
December 2021, exploring the impact of different variables on shipping
companies’ decision-making from individual companies’ perspectives.
3. Methodology and data
3.1. Discrete logit and Nested Logit models
The shipping company’s choice of ship can be regarded as a discrete
choice among multiple alternatives with different type and size.
Therefore, the type selection model is established from the discrete se­
lection model which is a common method to study choice behavior, and
the model constructed with individuals as the research unit is more
consistent with the actual situation. The most typical discrete choice
model is the Logit model. There are many kinds of Logit models, and the
Multinomial Logit, Conditional Logit and the Nested Logit models are
popularly used when there are multiple choice dependent variables
(Greene, 2012; McFadden, 1980). Generally, discrete choice methods
are based on the random utility theory, which assumes that decision
maker’s utilities for ship type alternatives are based on a deterministic
(observed factors) and a random component (unobserved errors). Under
this framework, the shipping companies’ ship choices are the result of
utility maximization, i.e., the decision maker will select a specific ship
type and size that can provide the highest utility. This makes it valuable
as it can simultaneously consider various types of factors in the utility
function, and this distinguishes it from other approaches, such as NPV,
ROA and cost-benefit methods.
Among the various Logit models, the Multinomial Logit and Condi­
tional Logit models require alternatives to be independent of each other
and is greatly restricted by the assumption of independence of irrelevant
alternatives (IIA assumption). The IIA assumption assumes that when
there are a set of alternatives, the odds of choosing A over B should not
depend on whether some other alternative C is present or absent, i.e., the
alternatives are not correlated and the choices among different alter­
natives are made simultaneously. However, based on observations and
previous studies (Fan and Luo, 2013), decisions on new orders and
second-hand vessels are usually different as newbuilding are more for
long-term strategy and second ones are more for short-term needs.
Therefore, when the cost of investing a new small vessel increase, the
shipping company is more possible to buy a new vessel with medium or
large size, rather than turning to second ones. This is called nested Logit
model, which assumes that shipping companies first decide to place a
new order or buy a second-hand ship and then select the ship size and
the substitution effect among alternatives in the same nest (new or
second) is larger than across nests (Fan and Luo, 2013). The decision
procedure follows a hierarchical or sequential process (Coolen and
Jansen, 2012). Fig. 2 illustrates the nests and alternatives in the choice
framework. The New and Second are defined as two nests, which are
called the type choice. The specific choice of ship size is called mode
choice, which includes small, medium and large vessel sizes.
Level 1 represents the 6 modes of ships: new and second vessels for
large, medium, and small (denoting with N1 to N3 and S1 to S3 sepa­
rately), and level 2 represents two types of ships for investment choices:
new (nest N) and second-hand (nest S) vessels. Assuming that the
random utility in the utility function of each selection branch obeys the
Gumbel distribution, the conditional probability of selecting various
ship modes at level 1 is (Greene, 2012):
( ) ( )
exp β′xj|i exp β′xj|i
P[j|i] = 3 = (j = 1, 2, 3, i = N, S) (1)
∑ (
exp β′Xn|i
) exp (Ii )
n=1
L. Fan et al.
Fig. 2. The choice illustration in the Nested Logic model.
Where, x is the vector of independent variables and β is the coefficient
vector influencing the choice of mode. Ii is the inclusive value, which
captures the influence of specific attributes of alternative on the selec­
∑3
tion of the nest. It is calculated as Ii = n=1 exp (β Xn|i ). Then, the
′
probability of choosing a new ship or a second-hand ship under level 2
is:
exp(γ′y i + τ i Ii )
P[i] = ∑
exp(γ′yi + τi Ii )
(N,S)
where, y is the vector of independent variables and γ is the coefficient
vector influencing the choice of type. τ is the coefficient of the inclusive
value. Therefore, we get
P[j] = P[j|i] × P[i]
The coefficients of the independent variables in the model can be
estimated using maximum likelihood estimation. Through above anal­
ysis, it is obvious that the criterion for choosing the logit models is the
test of IIA. If IIA holds, the decision of alternatives is independent of the
existence of more or fewer alternatives. This can be tested using the
Hausman’s test (Greene, 2012), which is expressed as χ 2 =
(̂ β full )′[ V
β partial − ̂ ̂ full ]− 1 (̂
̂ partial − V β full )′. Where, the subscript partial
β partial − ̂
indicates the estimates based on a restricted subset of alternatives, such
as deleting one alternative. Full indicates the full set of choices. V
̂ partial
and V̂ full are the estimated covariances matrices separately (Greene,
2012). The test procedure in the Stata software are performed in the
following steps:
(1) Run the full model with full alternatives illustrated in Fig. 2,
which is a constant and efficient estimator.
(2) Obtain the estimation using a restricted subset by deleting one
alternative in the full set, i.e., a partial subset.
(3) Calculate the Hausman statistic using above equation. It follows a
χ 2 -distribution with degrees of freedom of the rank of
(V̂ partial − V
̂ full ).
If the result is statistically significant, the estimation from the partial
subset is efficient but not consistent and the IIA assumption is rejected. It
is worth noting that Hausman’s test is based on estimating the variance
var( ̂ β full ) of the difference of the estimators by the difference
β partial − ̂
var[( ̂
β partial) − var(̂ β full )] of the variances. Under the statistical null hy­
pothesis, var[( β partial) − var(̂
̂ β full )] is a consistent estimator of var
var( ̂
β partial − ̂ β full ), but it is not necessarily positive definite “in finite
samples”. Therefore, we conduct a generalized Hausman test that
overcomes this problem which is called Seemingly Unrelated Estimation
in Stata. It follows the same procedure as above.
Above analysis and test procedure indicate the rigorousness and
validity of the Nested Logit model in analyzing the ship choice behavior,
as it can be applied only when the tests support the proposed structure.
In addition, the structure illustrated in Fig. 2 manifests its superiority to
Transport Policy 143 (2023) 1–9
other methods. The nested structure indicates the hierarchical or
sequential process (Coolen and Jansen, 2012). Therefore, we can
consider different influencing factors at different levels, which are dis­
cussed in detail in Section 4.2.
3.2. Data source and variable description
The data on new contracts and second-hand transactions are from
(2)
Clarksons’ World Fleet Register database. It involves 6358 individual
ship investment data from 684 shipping companies, including 4024
newbuildings and 2334 s-hand vessels from January 2000 to December
2021. Information related to time series and location advantage has
been considered in the study as discussed in previous studies. The time-
series variables such as demand, freight, containership newbuilding
(3) price and the second-hand price are obtained from Clarksons’ Shipping
Intelligence Network (SIN), which is reported in Table 1.
Following Fan and Xie (2021), Feeder, Handysize and Intermediate
ships are grouped as small (ship size between 0 and 3000 TEU). Pan­
amax and Post-Panamax ships are grouped as medium (ship size be­
tween 3000 and 8000 TEU), and the remaining ships are classed as large
(ship size above 8000 TEU). So, six alternatives can be derived and the
frequency of each mode can be found in Table 1. The dependent variable
Choice is 1 if a particular mode is chosen in investment and it is 0 for the
un-chosen modes.
Dummy variables China, Korea, Japan, EA and Other respectively
represent the places where vessels were built in Chinese mainland,
South Korea, Japan, Europe or the USA and elsewhere. According to
Clarksons’ WFR database, around 89% of the world fleet in tonnage are
built in the former three building countries (accessed in December
2021), while vessels built in the European countries and the USA are
generally regarded as advanced and high-qualified in shipbuilding
technology (Fan and Xie, 2021).
As this study examines companies’ ship size preferences and in­
vestment decisions, it is pertinent to examine the effect of companies’
characteristics on their decisions. WFR provides the owned fleet size for
each company and we obtained this data at the end of 2021. Since it also
provides the detailed information on new contract, sale and sells and
demolish records, the actual fleet size in previous years can also be
calculated. Consequently, the market share of each company in each
year can be obtained using this data base, which is denoted as Market­
share in Table 1. Because a company’s market share reflects its status and
influence in the market, most companies are endeavouring to increase it
by investing in vessels. However, new and second-hand vessels have
different advantages and disadvantages, such as technology advance­
ment of new ships and quick delivery of second-hand ones. Therefore,
the preferences may be different for different type of companies’ con­
siderations, such as long-run competency or short-run cost-benefit.
Therefore, the effect of market share on the ship type or mode prefer­
ences are included in the empirical analysis.
Similar to the variable Marketshare, Rival is also yearly based and it is
defined as the rival companies’ capacity expansion rate in this study. It is
calculated as the growth rate of the market capacity excluding a com­
pany itself (Fan, Gu, & Yin, 2021). It is calculated as Rivalk =
4
L. Fan et al. Transport Policy 143 (2023) 1–9

Table 1
Statistical description of variables.
Dependent Variables Description Mode Freq. Percent Mode Freq. Percent

Choice 0-3000 TEU N1 (New-Small) 1844 29.97% S1 (Second-Small) 1539 25.02%

3001-8000 TEU N2 (New-Medium) 836 13.59% S2 (Second-Medium) 575 9.35%
8001 over N3 (New-Large) 1207 19.62% S3 (Second-Large) 151 2.45%

Independent Variables Description Mean Std. Dev. Min Max

China 1 if vessel is built in Chinese Mainland, 0 otherwise 0.390 0.488 0 1

Japan 1 if vessel is built in Japan, 0 otherwise 0.097 0.296 0 1
Korea 1 if vessel is built in Korea, 0 otherwise 0.316 0.465 0 1
EA 1 if vessel is built in Europe or America, 0 otherwise 0.121 0.326 0 1
Other 1 if vessel is built in other places, 0 otherwise 0.076 0.265 0 1
Demand World container trade (Million TEU) 160.114 35.278 102.290 206.143
Marketshare Market share of companies *100 1.065 1.726 − 0.115 7.579
Rival The growth rate of other companies except one’s own *100 7.528 4.239 0.158 15.640
Price Containership newbuilding and second-hand prices ($ Million) 6.802 3.388 0.625 14.667
Freight CCFI Composite Index 1.247 0.618 0.642 3.277

∑
Increased tonnage to apply the Nested Logit model. Following the introduced procedure in
∑i∕
=k
for each company k in each year. This variable is
Total tonnage Section 3.1, the Hausman’s and the Seemingly Unrelated Estimation
i∕
=k
tests are conducted and the results are reported in Table 2. Seeing from
included in the empirical model to capture the response of the shipping
the results, almost all the tests reject the IIA assumption. Therefore, the
companies facing the capacity expansion of all other companies. In
Nested Logit model is appropriate in modeling the container ship type
practice, liner companies usually pay much attention to their capacity
and mode choices.
shares in the market so as to keep their long-run competency. So, they
are keen on competitors’ capacity expansion, especially for the larger
companies. They can compete with competitors by investing in larger
4.2. Results and discussion
vessels as they are more capable to expand in terms of resources and
finance. The consideration of smaller companies may be different as it is
Table 3 reports the correlation matrix with significance levels.
difficult for them to be leaders in the expansion. However, they may also
Although most of the correlations are highly significant, the coefficients
keen on competitors’ capacity expansion to survive in the market.
are low except the those between Freight and Rival, and Freight and De­
Consequently, the effects of Rival may be different for different com­
mand. Because of these high correlations, we use stepwise regressions to
panies. So, we include the interaction term of Marketshare and Rival in
avoid any potential issues caused by multicollinearity and those results
the empirical model.
with fewer variables are reported in Appendix A and B. Since all the
The investment cost of newbuildings and second-hands are different,
estimated coefficients and their significance are almost the same, we
which is denoted as Price. Fig. 3 illustrates the average prices for new
only discuss the full model with all the independent variables in this
and second-hand vessels with different sizes. It is obvious that the prices
section.
of newbuildings are generally higher than those of the second ones with
the same size and larger vessels are more expensive due to the technical
Table 2
update and iteration.
IIA tests.
The world container trade (Demand) derived from SIN represents the
demand for container shipping services. Since the specific freight rates Alternative deleted in partial models Hausman’s test Seemingly
Unrelated
for the vessels deployed on each route are almost impossible to obtain,
Estimation test
Clarksons freight index (Freight) is used to indicate the container ship­
ping market’s freight level. Price, Freight and Demand are all monthly- χ2 Prob χ2 Prob

based data from SIN. new-small − 1138.26 -a

1983.66 0.00
new-medium 31.69 0.003 251.00 0.00
New-large − 1.00 1.00 616.71 0.00
4. Empirical results and discussion
second-small 19.11 0.06 1099.76 0.00
second-medium 333.65 0.00 500.07 0.00
4.1. Model validation second-large 0.00 1.00 144.78 0.00

Note: a model fitted on the data fails to meet the asymptotic assumptions of the
As introduced above, the IIA assumption needs to be tested in order Hausman test, so it was not reported in the Stata software.

Fig. 3. Ship prices of new and second-hand vessels.

5
L. Fan et al. Transport Policy 143 (2023) 1–9

Table 3
Correlation table.
Variables Demand Freight Price Marketshare Rival China Japan Korea EA Other

Demand 1.000
Freight 0.416*** 1.000
Price − 0.231*** 0.154*** 1.000
Marketshare 0.208*** 0.229*** 0.001 1.000
Rival − 0.024*** 0.750*** 0.280*** 0.133*** 1.000
China 0.130*** 0.097*** − 0.013*** − 0.081*** 0.049*** 1.000
Japan − 0.005 − 0.035*** − 0.015*** − 0.033*** − 0.023*** − 0.262*** 1.000
Korea − 0.039*** − 0.015*** 0.023*** 0.122*** 0.023*** − 0.544*** − 0.223*** 1.000
EA − 0.093*** − 0.057*** 0.002 − 0.017*** − 0.055*** − 0.297*** − 0.122*** − 0.252*** 1.000
Other − 0.052*** − 0.042*** − 0.001 − 0.009 − 0.038*** − 0.229*** − 0.094*** − 0.195*** − 0.106*** 1.000

***p < 0.01, **p < 0.05, *p < 0.1.

Table 4 is the estimated result, which contains two parts. The upper
part illustrates the estimates for different levels (see Fig. 2) in the model,
while the lower part reports the models’ goodness of fit. Because of some
missing values, 6008 actual investment data enter into the final model,
which comprises 36,048 observations as there are total 6 alternatives to
choose from. The reported Wald χ2 and its corresponding p-value sug­
gest the high level of goodness of fit. Meanwhile, Stata also reports the
dissimilarity parameters in the final row of Table 4. The coefficients of
the inclusive values are both statistically significant and the LR test also
suggests that the IIA assumption is rejected. This further manifests the
appropriateness of applying the Nested Logit model in this study.
Seeing from Table 4, different factors are considered for different
levels. In the model choice of level 1 (see Fig. 2), the company strategy
variables are considered to manifest how the strategies impact ship type
preferences. In the type choice of level 2, the ship building country and
market variables are included to reveal the different preferences on new
and second-hand vessels. This actually indicates the significance of the
Nested Logit model in analyzing ship investment behavior, as it can
consider different decisions simultaneously in the model. It is worth
noting that the estimated coefficients are the marginal effects of the
considered factors in the model. Since the observed ship type distribu­
tion in Fig. 1 is the result of various factors, through simultaneous
consideration of all the factors in this Nested Logit model, the marginal
effect of each factor can be separated.
In the shipping industry, the capital cost of a ship is relatively high no
matter it is a new or second one. As one of the most crucial business
activities of shipping companies, ship investment is inevitably con­
nected with the capital position, fleet structure and transport capacity of
the company. Therefore, Price is included in the specific choice. Its co­
efficient in Table 4 is negatively significant. This result is consistent with
the general economic theory as the likelihood of choosing a particular
ship decreases with the its increase in investment prices keeping all
other variables constant.
The results of type choice decisions are reported in the middle of the
upper part of Table 4. There are two types of ships, i.e., new and second,
and the new ship type is regarded as the base type to compare with. The
positive coefficient for EA suggests that shipping companies tend to
invest in second-hand vessels built in Europe compare to new ones. They
are unlikely to buy second-hand vessels made in the China manifesting
by the negatively significant coefficients for China. While, the non-
significant of the coefficients for Japan and Korea suggests that the
preferences of new and second-hand vessels are indifference to the
vessels built in Japan and Korea.
The coefficients for Freight and Demand are both statistically signif­
icant and positive for the selection of second-hand vessels. These results
indicate that the higher the freight and demand, the more likely it is for
the shipping company to buy second-hand vessels keeping all other
variables constant. This echoes to Branch and Stopford (2013), in a

Table 4
Estimated results of the Nested Logit full model.
Variables Choice

Price − 0.055***
(0.010)
Type
China Japan Korea EA Freight Demand
Base:New - - - - - -
Second − 1.160*** 0.215 − 0.164 1.938*** 0.455*** 0.023***
(0.128) (0.149) (0.127) (0.155) (0.149) (0.002)
Mode
N1 N2 N3 S1 S2 S3
Marketshare – 0.667*** 1.564*** − 4.553*** 7.214*** 14.586***
(0.230) (0.343) (0.597) (1.465) (2.653)
Rival – 0.170*** 0.116*** − 0.140 0.927** − 4.605***
(0.038) (0.030) (0.154) (0.447) (0.886)
Marketshare*Rival – 0.059*** 0.022 0.174*** − 0.106 0.133
(0.021) (0.019) (0.042) (0.092) (0.165)
Constant – − 2.097*** 1.257*** − 23.005*** − 100.311*** − 165.596***
(0.479) (0.352) (4.632) (20.322) (37.196)
Model Fit
Number of Observations 36,048 Number of Cases 6008
Log Likelihood − 7839.188 Wald Chi2 (22) 997.130
Prob>χ2 0.000
Dissimilarity Parameters
New_tau 1.210*** LR test for IIA
(0.237) χ2 (2) 560.69
Second_tau 61.065*** Prob > χ2 0.000
(13.270)

Note: Standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1.

6
L. Fan et al.
prosperous market, second-hand vessels are more preferred than new­
buildings as they can be quickly put into market without waiting for the
construction time. It is noteworthy that the estimated results of these
variables are the marginal effects of them on the preference of
second-hand vessels compare with the new ones. i.e., in a prosperous
market, such as high in freight rate or demand, both new and
second-hand vessels are more likely to be invested, while the
second-hand ones are more preferred with all other factors unchanged.
Since this study investigates the preferences for different ship modes
and this is actually determined by the shipping companies’ character­
istics or consideration, we include the company strategy variables in the
mode choice (level 1 in Fig. 2). The estimation result for these factors are
illustrated at the end of the upper part of Table 4. The coefficients for
Marketshare are positive except for the second small vessels (S1). This
suggests that larger companies with larger market shares are more in­
clined to invest in larger vessels, no matter for new (N2 and N3) or
second-hand (S2 and S3) vessels. With the development of shipping
technology, container ships tend to be larger, which has a significant
position in the global market (Cullinane and Khanna, 1999). Because of
economies of scale, less fuel and labor are needed, and it can also low
down the shipping costs and carbon emissions. In addition to this,
shipping companies will bear high capital costs if they invest in ships,
especially for larger ships. Therefore, larger companies with higher
capital stock have more possibility or ability to invest in large and
medium-sized ships to help them expand their market shares in turn.
Furthermore, comparing the coefficients for different modes, the co­
efficients for second-hand vessels are larger than those for the new ones,
indicating that second-hand vessels are more inclined to be invested by
larger companies with larger market shares as they can be delivered to
the market more quickly.
Concerning the variable Rival, the negative and significant coeffi­
cient for mode S3 indicates that as their opponents’ capacity expands,
shipping companies tend not to buy larger second-hand ships compared
to base mode 1 (small new ships). However, the coefficients for N2, N3
and S2 are positively significant indicating their preferences for these
vessels in response to competitors’ capacity expansion. This is reason­
able as generally medium and large vessels are more preferred by
companies to compete with competitors.
The coefficients for the interaction terms between Marketshare and
Rival are positively significant for N2 and S1, while all the others are not
significantly different with the base mode N1. This indicates the different
sensitivities of larger companies to the choice of different modes of
vessels in responding to competitors’ capacity expansion. In general,
companies are inclined to invest in larger vessels responding to com­
petitors’ expansion and larger companies are more sensitive by ordering
small (second) and medium (new) ones.
4.3. Implications
The Nested Logit model adopted in this study can help disclose the
liner company’s ship investment choice mechanism, which follows in
sequence. Generally, they will decide on placing a new order or buying a
second-hand vessel first, and then select the specific ship size to invest.
The estimated result from the Nested Logit model also indicates that the
substitution effect among alternatives in the same nest is larger than
across nests (Fan and Luo, 2013; Greene, 2012). For example, a liner
company, who initially intend to buy a new medium size vessel, is more
likely to buy a small or large size new vessel rather than a second-hand
one when the original choice is not available.
According to the estimated results, generally large liner companies
with larger market shares are more inclined to buy larger types of vessels
no matter they are new or second ones. In addition, the positive co­
efficients of rival companies’ expansion also suggest the companies’
investment strategies in competing market shares. Meanwhile, the
interaction terms between market share and rival companies’ expansion
are positive for some certain types of vessels. These all indicate the
7
Transport Policy 143 (2023) 1–9
aggressiveness of the larger liner companies in expanding and
competing with competitors. This explains the continuous market share
increasing of top companies in the liner market. Since larger company’s
investment and expansion may be responding to the market or
competing with and squeezing competitors, smaller companies should
be more rational so as to avoid blind investing following larger com­
panies’ expansion.
5. Conclusions
The shipping industry, especially the container market, is capital-
intensive, and investing in containerships is one of the most important
commercial activities in the market. Companies need to decide the time
to place an order for newbuildings or the opportunity to buy second-
hand vessels. There are also plenty of various sizes of containerships
such as Feeder, Handysize, Panamax and so on in the market. Hence ship
choice is a critical and important decision for shipping companies to
make.
Most of the previous studies on shipping investment discussed the
investment behavior of shipping companies in certain markets, such as
the new or second-hand market. In most cases, they are conducted at the
market or industry level. Different with them, this study employs the
individual ship investment data to investigate the global container
shipping companies’ actual ship choice decisions. Compiled by different
database, it includes 6294 new and second-hand individual ship in­
vestment data from January 2000 to December 2021 and the Nested
Logit regression is used to analyze the preferences of container ships.
Both the validation analysis and empirical results suggest the appro­
priateness and high level of goodness of fit of the Nested Logit model.
This indicates investment mechanism in the liner market, which follows
a general sequence, i.e. decide on new or second first, then on the spe­
cific mode. Consequently, the substitution effect among alternatives in
the same nest (new or second) is larger than that across nests.
The estimated coefficient results suggest that shipping companies
tend to buy second-hand vessels made in Europe and less likely to buy
those made in China. In a prosperous market, such as high in freight or
demand, second-hand vessels are more preferred than newbuildings as
they can be quickly put into market without waiting for the construction
time. The company status variables are considered in the mode choice
and the estimated results suggest that larger companies are more in­
clined to invest in larger vessels no matter for new or second-hand
vessels because of the benefit brought by economies of scale. We also
consider the impact of all the other companies average expansion rate in
each year. The estimated result suggests that in responding to compet­
itors’ capacity expansion, shipping companies tend to buy new larger
vessels although larger companies are more sensitive as they are more
inclined to compete in market shares. Since several factors contribute to
larger companies’ preference of larger vessel investment, it points out
the importance of being cautious when making investment decisions for
the smaller companies, especially when they are following larger com­
panies’ expansion activities. Larger companies’ capacity expansion may
be driven by demand or simply competing with and squeezing rivals in
the market.
The results of this study can be useful to the global shipping industry.
It reveals the actual choice preferences and analyzes the effect of each
factor on the investment decision of individual ships. Shipping com­
panies can adjust their investment strategies to avoid superfluous input
and gradually seize the market during competition. The results can also
be applied by financial investors and maritime administrations to
facilitate policy or regulation making.
Similar to all studies, this study also has some limitations. Due to
data limitations, the study only looks at container markets, ignoring
other types of ships. Future analyses could be expanded to other seg­
ments. Because this study is conducted using general global data, the
results may not be necessarily appropriate if a particular route or area is
studied. Other studies can focus on some specific companies and
L. Fan et al. Transport Policy 143 (2023) 1–9

consider the effects of their financial performance, capital condition and Data availability
business management strategies in the future.
Data will be made available on request.
CRediT author statement
Acknowledgements
Lixian Fan: Conceptualization, Methodology, Software, Formal
analysis, Writing-Original Draft. Ziyan Li: Data curation, Visualization, This work was supported by the fund of Chinese Ministry of Educa­
Investigation. Jiaqi Xie: Data curation, Writing- Original draft prepara­ tion, Humanities and Social Sciences [21YJA630013] and the Fund of
tion. Jingbo Yin: Supervision, Resources, Writing- Reviewing and National Engineering Research Center for Water Transport Safety
Editing. [A2022004].

Appendix A. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.tranpol.2023.09.005.

Appendix A. Estimated results of the Nested Logit model without Freight and Demand

Variables Choice

Price − 0.041***

(0.007)

Type

China Japan Korea EA Freight Demand

Base:New - - - -
Second − 1.044*** 0.276* − 0.101 1.703***
(0.124) (0.144) (0.123) (0.146)

Mode
N1 N2 N3 S1 S2 S3

Marketshare – 0.509*** 1.211*** − 4.484*** 7.683*** 22.730***

(0.175) (0.262) (0.700) (2.121) (3.568)
Rival – 0.126*** 0.086*** − 1.696*** 5.348*** − 4.971***
(0.027) (0.022) (0.218) (0.626) (1.224)
Marketshare*Rival – 0.046*** 0.018 0.011 − 0.068 − 0.310
(0.017) (0.015) (0.040) (0.083) (0.241)
Constant – − 1.613*** 0.839*** − 26.875*** − 197.348*** − 301.297***
(0.361) (0.242) (7.291) (37.063) (65.496)

Model Fit
Number of Observations 36,048 Number of Cases 6008
Log Likelihood − 7967.332 Wald χ2 (20) 718.670
Prob>χ2 0.000
Dissimilarity Parameters
New_tau 0.925*** LR test for IIA
(0.175) χ2 (2) 1166.7
Second_tau 111.183*** Prob > χ2 0.000
(23.224)
Note: Standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1.

Appendix B. Estimated results of the Nested Logit model only includes Freight

Variables Choice

Price − 0.098***
(0.010)
Type
China Japan Korea EA Freight Demand
Base:New - - - - -
Second − 1.048*** 0.289** − 0.098 1.806*** 1.279***
(0.125) (0.145) (0.124) (0.149) (0.150)
Mode
N1 N2 N3 S1 S2 S3
Marketshare – 1.229*** 2.611*** − 5.376*** 11.114*** 23.478***
(0.334) (0.400) (0.852) (2.193) (3.913)
Rival – 0.291*** 0.210*** − 1.256*** 4.176*** − 5.231***
(0.046) (0.038) (0.225) (0.595) (1.297)
Marketshare*Rival – 0.078** 0.028 0.107** − 0.159* − 0.276
(0.031) (0.029) (0.048) (0.089) (0.265)
Constant – − 3.432*** 2.411*** − 31.600*** − 187.850*** − 287.189***
(0.571) (0.456) (8.102) (37.782) (66.663)
(continued on next page)

8
L. Fan et al. Transport Policy 143 (2023) 1–9

(continued )
Variables Choice

Model Fit
Number of Observations 36,048 Number of Cases 6008
Log Likelihood − 7929.790 Wald χ2 (21) 771.410
Prob>χ2 0.000
Dissimilarity Parameters
New_tau 2.000*** LR test for IIA
(0.247) χ2 729.17
Second_tau 109.635*** Prob > χ2 0.000
(24.236)
Note: Standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1.

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