Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcasts
  • About Us
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Cold Call Podcast
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    • COVID-19 Business Impact Center
      COVID-19 Business Impact Center
      Waves in Ship Prices and Investment
      23 Aug 2013Working Paper Summaries

      Waves in Ship Prices and Investment

      by Robin Greenwood and Samuel Hanson
      Dry bulk shipping is a highly volatile and cyclical industry in which earnings, investment, and returns on capital appear in waves. In this paper, the authors develop a model of industry capacity dynamics in which industry participants have trouble forecasting demand accurately and fail to fully anticipate the effect that endogenous supply responses will have on earnings. The authors estimate the model using data on earnings, secondhand prices, and investment in the dry bulk shipping industry between 1976 and 2011. Findings show that returns to owning and operating a ship are predictable and closely related to industry-wide investment in capacity. High current ship earnings are associated with higher ship prices and higher industry investment, but predict low future returns on capital. Conversely, high levels of ship demolitions-a measure of industry disinvestment-forecast high returns. Key concepts include:
      • Real-world economic agents may repeatedly underestimate the power of long-run competitive forces, particularly in markets-such as industries with long time-to-build delays-where feedback is delayed and learning is slow.
      • The annual realized returns to owning a ship vary enormously over time, from a low of -76% between December 2007 and December 2008 to a high of +86% between June 1978 and June 1979.
      • Cycles in investment, lease rates, and secondhand prices are connected to predictable variation in the returns to ship owners.
      • Heavy investment during booms predictably depresses future earnings and the price of capital, leading prices to overshoot their rational-expectations levels.
      LinkedIn
      Email

      Author Abstract

      We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants' competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: July 2013
      • HBS Working Paper Number: NBER 19246
      • Faculty Unit(s): Finance
          Trending
            • 06 Jan 2021
            • Research & Ideas

            Unexpected Exercise Advice for the Super Busy: Ditch the Rigid Routine

            • 11 Jan 2021
            • Research & Ideas

            Is A/B Testing Effective? Evidence from 35,000 Startups

            • 13 Jan 2021
            • Research & Ideas

            How 'Small C' Change Can Beat Large-Scale Rebuilding

            • 13 Jul 2020
            • Research & Ideas

            Merck CEO Ken Frazier Discusses a COVID Cure, Racism, and Why Leaders Need to Walk the Talk

            • 25 Feb 2019
            • Research & Ideas

            How Gender Stereotypes Kill a Woman’s Self-Confidence

        Robin Greenwood
        Robin Greenwood
        George Gund Professor of Finance and Banking
        Unit Head, Finance
        Contact
        Send an email
        → More Articles
        Samuel G. Hanson
        Samuel G. Hanson
        Professor of Business Administration
        Contact
        Send an email
        → More Articles
        Find Related Articles
        • Finance
        • Strategy

        Sign up for our weekly newsletter

        Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
        ǁ
        Campus Map
        Harvard Business School Working Knowledge
        Baker Library | Bloomberg Center
        Soldiers Field
        Boston, MA 02163
        Email: Editor-in-Chief
        →Map & Directions
        →More Contact Information
        • Make a Gift
        • Site Map
        • Jobs
        • Harvard University
        • Trademarks
        • Policies
        • Digital Accessibility
        Copyright © President & Fellows of Harvard College