Debt Overhang and Investment Efficiency

49 Pages Posted: 13 Mar 2018

See all articles by Francesca Barbiero

Francesca Barbiero

European Central Bank (ECB)

Alexander A. Popov

European Central Bank (ECB)

Marcin Wolski

European Investment Bank

Date Written: March 2018

Abstract

Using a pan-European dataset of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. This effect is robust to controlling for firm fixed effects and for country-sector-time fixed effects. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories highlighting the disciplining role of debt over equity.

Keywords: Banking crises., Debt overhang, Investment misallocation

JEL Classification: E22, E44, G21, H63

Suggested Citation

Barbiero, Francesca and Popov, Alexander A. and Wolski, Marcin, Debt Overhang and Investment Efficiency (March 2018). CEPR Discussion Paper No. DP12784, Available at SSRN: https://ssrn.com/abstract=3138846

Francesca Barbiero (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alexander A. Popov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marcin Wolski

European Investment Bank ( email )

Luxembourg City, 2968
Luxembourg
691286623 (Phone)

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