Debt overhang, credit demand and financial conditions

Isabel Argimón () and Irene Roibás ()
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Isabel Argimón: Banco de España
Irene Roibás: Banco de España

No 2308, Working Papers from Banco de España

Abstract: The empirical literature on the debt overhang hypothesis has estimated the relationship between investment and leverage at the firm level, which does not allow to disentangle between a firm’s decision not to invest as it is highly indebted and its ability to obtain the necessary resources. Using annual Spanish credit data from the Central Credit Register and non-financial corporations’ annual accounts from the lntegrated Central Balance Sheet Data Office Survey for the period 2004-2019, we study the impact of corporate debt on non-financial firms’ demand for bank loans, as a proxy for their willingness to invest. We find a negative relationship between firms’ leverage and demand for bank credit, thus supporting the debt overhang hypothesis. We then study whether such relationship is affected by financial conditions and find that a reduction in short-term interest rates mitigates the effect of firms’ leverage on demand for credit.

Keywords: credit demand; corporate investment; debt overhang; financial conditions; interest rates; leverage (search for similar items in EconPapers)
JEL-codes: E22 E41 E43 E52 G21 G32 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2023-01
New Economics Papers: this item is included in nep-cfn, nep-des and nep-eec
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2308

DOI: 10.53479/29530

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