The costs of corporate debt overhang

Kristian Blickle; João A.C. Santos

doi:10.1016/j.jfi.2024.101118

The costs of corporate debt overhang

Kristian Blickle, João A.C. Santos

NOVA School of Business and Economics (NOVA SBE)

Research output: Contribution to journal › Article › peer-review

2 Citations (Scopus)

Abstract

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm's debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

Original language	English
Article number	101118
Journal	Journal of Financial Intermediation
Volume	60
DOIs	https://doi.org/10.1016/j.jfi.2024.101118
Publication status	Published - Oct 2024

Keywords

Covid-19
Debt overhang
External funding

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Cite this

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title = "The costs of corporate debt overhang",

abstract = "We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm's debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.",

keywords = "Covid-19, Debt overhang, External funding",

author = "Kristian Blickle and Santos, \{Jo{\~a}o A.C.\}",

note = "Funding Information: We thank the editor, Franklin Allen, and an anonymous referee as well as George Pennacchi, Bo Becker, Darrell Duffie, Sebnem Kalemli-Ozcan, Arvind Krishnamurthy, Anna Kovner, Adair Morse, Amir Sufi, Enrique Schroth, and seminar participants at the Festschrift in Honor of Douglas Gale, the 2022 Banco de Portugal Financial Intermediation Conference, CEMFI, ECB, NY Fed, Durham University, and Nova SBE for valuable comments. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York, or the Federal Reserve System. Publisher Copyright: {\textcopyright} 2024 Elsevier Inc. All rights are reserved, including those for text and data mining, AI training, and similar technologies.",

year = "2024",

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doi = "10.1016/j.jfi.2024.101118",

language = "English",

volume = "60",

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AU - Blickle, Kristian

AU - Santos, João A.C.

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Y1 - 2024/10

N2 - We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm's debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

AB - We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm's debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

KW - Covid-19

KW - Debt overhang

KW - External funding

UR - https://www.scopus.com/pages/publications/85207867778

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DO - 10.1016/j.jfi.2024.101118

M3 - Article

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SN - 1042-9573

VL - 60

JO - Journal of Financial Intermediation

JF - Journal of Financial Intermediation

M1 - 101118

ER -

The costs of corporate debt overhang

Abstract

Keywords

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