Corporate Debt Overhang and Investment: Firm-Level Evidence

31 Pages Posted: 28 Aug 2018

See all articles by Eduardo Borensztein

Eduardo Borensztein

Inter-American Development Bank (IADB)

Lei Sandy Ye

World Bank

Date Written: August 15, 2018

Abstract

This paper investigates empirically the linkages between corporate debt overhang and investment activity at the firm level for a cross section of large-sized emerging market and developing economies. It analyzes the extent to which investment may be discouraged by high levels of debt that put at risk future profits, as well as firm dimensions that may sharpen the debt-investment link. Using balance sheet data from a broad set of emerging market and developing economy firms, the analysis suggests that corporate debt overhang imposes a sizable effect on investment at the firm level. This linkage is more pronounced for large firms and highly leveraged firms. The analysis also finds evidence of a nonlinear effect, in which debt overhang discourages investment more severely under high levels of indebtedness.

Keywords: Economic Growth, Access to Finance, Construction Industry, Common Carriers Industry, Food & Beverage Industry, Business Cycles and Stabilization Policies, General Manufacturing, Plastics & Rubber Industry, Pulp & Paper Industry, Textiles, Apparel & Leather Industry, Mining & Extractive Industry (Non-Energy)

Suggested Citation

Borensztein, Eduardo and Ye, Lei Sandy, Corporate Debt Overhang and Investment: Firm-Level Evidence (August 15, 2018). World Bank Policy Research Working Paper No. 8553, Available at SSRN: https://ssrn.com/abstract=3238397

Eduardo Borensztein (Contact Author)

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Lei Sandy Ye

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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