Net asset value discounts and premiums in the maritime shipping industry

• Published date: 01 March 2022
• Author: Andreas Andrikopoulos,Anna Merika,Christos Sigalas
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/eufm.12313

Eur Financ Manag. 2022;28:510–544.wileyonlinelibrary.com/journal/eufm510

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© 2021 John Wiley & Sons Ltd.

DOI: 10.1111/eufm.12313

ORIGINAL ARTICLE

Net asset value discounts and premiums in the

maritime shipping industry

Andreas Andrikopoulos

1

|Anna Merika

2

|Christos Sigalas

2

1

Department of Business Administration,

University of the Aegean, Chios, Greece

2

Deree—The American College of

Greece, School of Business and

Economics, Athens, Greece

Correspondence

Christos Sigalas, Deree—The American

College of Greece, School of Business and

Economics, 6 Gravias St., 15342 Athens,

Greece.

Email: csigalas@acg.edu

Abstract

This paper examines net asset value (NAV) discounts

and premiums in the setting of the maritime shipping

industry. We employ a qualitative study with equity

analysts as well as a quantitative study with a unique

panel data, to explore and empirically investigate, re-

spectively, the reasons underpinning NAV discounts

and premiums. Our findings suggest that deviations of

market capitalisation from NAV are associated with

firm‐specific factors, such as public maritime shipping

companies’capital structure, stock liquidity, fleet ac-

quisition cost, operating performance, institutional

ownership, cost of capital, corporate governance, divi-

dend policy, and related party transactions.

KEYWORDS

equity valuation, net asset value, net asset value discount, net

asset value premium, public maritime shipping companies

JEL CLASSIFICATION

G12, G14, G32

1|INTRODUCTION

If one were to buy a maritime shipping company, why should she pay any price that is different

from the market value of the company's vessels, net of their liabilities? This question is based

on the proposition that the market value of equity should be equal to the net asset value (NAV),

that is, the market value of assets minus the market value of total liabilities. However, in the

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The authors would like to gratefully thank the two anonymous referees, the associate editor and the editor for their

helpful comments and insightful suggestions on former versions of this paper.

maritime shipping industry, deviations between the market capitalisation and NAV are fre-

quent (Brady, 2019; Mehrotra, 2015; Simic et al., 2016). These deviations emerge because there

are two markets where the value of equity is priced, and these markets often disagree. On the

one hand, in the case of public maritime shipping companies, the market value of equity, as

measured by market capitalisation, is priced every day in stock markets. On the other hand, the

fair value of equity, as being approximated by subtracting total liabilities from market‐value‐

adjusted total assets (the public maritime shipping company's assets primarily consist of ves-

sels), can be estimated in vessel markets. When the outcomes in these two markets (stock and

vessel) are different, then we have a violation of the law of one price, and this is an asset pricing

challenge. Trading frictions in both vessel markets and stock markets, as well as differences

between the two type of assets, that is, vessels and stocks, preclude the possibility of arbitrage in

the way that is prescribed by microeconomic theory, that is, riskless profit that does not require

spending one's own financial resources. Indeed, in this case, one simply cannot go short on the

overvalued asset and long on the undervalued one and expect to make riskless profit. However,

deviations between the two markets could be associated with speculative, profitable investment

strategies.

1

Trading opportunities and trading frictions in vessel and stock markets tend to

eliminate and preserve, respectively, the deviations between market capitalisation and NAV.

The interplay between these two forces, that is, trading opportunities and trading frictions,

determines the persistence of deviations between market capitalisation and NAV, that is, NAV

discounts/premiums. For example, taking a public maritime shipping company, which is

trading at a discount to its NAV, private, might lead to superior returns if the private share-

holders proceed with the liquidation of its assets. Nevertheless, such NAV discounts may not be

directly exploitable via the ‘delist and liquidate’investment strategy in a relatively illiquid

vessel market and, consequently, deviations of observed stock prices from net asset values per

share can persist.

To sort out this valuation challenge, we must explore NAV discounts and premiums across

time and across companies to identify which company‐specific characteristics force the out-

comes in asset markets to diverge from the outcomes in the equity capital markets. So far, this

debate has addressed asset pricing challenges in closed‐end funds and real estate investments.

Maritime shipping companies’stocks also exhibit NAV discounts and premiums, but they have

never been studied before in this respect. Less liquid than the assets held by closed‐end funds

and more liquid than the assets held by real estate investment trusts (REITs), vessels pose a

formidable asset pricing challenge, as they indicate a price for maritime shipping stocks that is

different than the one observed in organised equity capital markets. Moreover, information on

vessel attributes and sales‐and‐purchases (S&P) is disseminated across international market

participants in the maritime shipping industry, raising doubts on the ability of stock markets to

reflect vessel S&P market outcomes. The uniqueness of maritime shipping companies made us

reassess all the arguments in prior research about NAV discounts and premiums in closed‐end

funds and property companies. As literature on NAV discounts and premiums is elusive, we

started with qualitative study to identify firm‐specific reasons underpinning NAV discounts

and premiums in the maritime shipping industry and then proceeded with a quantitative study

1

Assume, for example, that a public maritime shipping stock is trading at a deep discount, observed stock price being $S, implied fair value of equity from

observed vessel prices being $V, the ‘correct’asset price from both markets lying on the midpoint, at 0.5 (S + V). If the interest rate is less than 0.5 (S + V)/S and

both markets are expected to reach the ‘correct’price, then one could borrow a monetary amount equal to $S, buy the stock of the public maritime shipping

company that is expected to appreciate in price and repay the debt from the investment profit (expectations on asset prices may not materialise and this strategy

is risky).

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to examine those reasons or factors of NAV discounts and premium. First, we conducted a

survey with equity analysts who evaluate maritime shipping stocks in search for the ante-

cedents of NAV discounts and premiums. The proposed factors of NAV discounts and pre-

miums were assessed with an empirical research by employing econometric analysis. By using

unique panel data of all available public maritime shipping companies for the period

2011–2018, we found that capital structure, stock liquidity, fleet acquisition cost, operating

performance, institutional ownership, cost of capital, corporate governance, dividend policy,

and related party transactions are important factors of the deviation between market capita-

lisation and NAV.

The rest of the paper is organised as follows. Section 2reviews prior research on NAV

discounts and premiums in closed‐end funds and real estate investments, as well as on vessel

valuation; it concludes with the premise that the maritime shipping industry is a unique asset‐

pricing challenge. Section 3presents the methods and the analysis of the qualitative study,

conducted to identify the various antecedents of NAV discounts and premiums for public

maritime shipping companies. Section 4presents the methods and the results of the quanti-

tative study, conducted to assess the identified factors of NAV discounts and premiums.

Section 5discusses the results of the empirical investigation in conjunction with the qualitative

study's findings and propositions in prior research and Section 6concludes the paper.

2|LITERATURE REVIEW

Over the last 30 years, NAV discounts and premiums have been explored with respect to closed‐

end funds and real estate companies. Closed‐end funds (investment trusts in the United

Kingdom) and exchange‐traded funds (ETFs) present an important asset pricing puzzle:

Closed‐end fund market prices and NAV often diverge, even though they should be equal to the

market value of equity since they both reflect the value of a fund's share. To the extent that

these divergences persist, they constitute evidence of market inefficiency, measure of portfolio

performance and starting point for both regulatory reform and profitable investment strategies

(Allen et al., 2016; Chen et al., 2018; Cheng et al., 1994; Kellerhals & Schobel, 2002).

2.1 |NAV discounts and premiums in closed‐end funds

NAV discounts and premiums in closed‐endfundsmaybeattributedtoaplethoraof

factors. One such factor is liquidity. Though closed‐endfundsandETFsareoftenliquid

investments some of the assets in their portfolio may not be just as liquid, and the prices of

illiquid (i.e., thinly traded) assets often fail to capture fluctuations of fundamental values,

thereby, leading to NAV discounts and premiums (Dimson & Minio‐Kozerski, 1999;Chan

et al., 2008; Picotti, 2018).

Another factor that has been considered to cause NAV discounts and premiums is man-

agerial discretion and performance. On the contrary, NAV premiums can be considered as the

outcome of superior performance in portfolio management: Fund managers set up a portfolio

that some individual investors might fail to construct, and their success is manifest in NAV

premiums (Kearney et al., 2014). On the contrary, institutional investors (who regularly invest

in closed‐end funds) can replicate almost any portfolio on their own. In this respect, managerial

expenses for closed‐end funds may reflect the costs of an agency conflict between fund

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