Corporate Debt and Investment in the Post-Covid World

Rodrigo Heresi and Andrew Powell

No 12422, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: We study the relationship between corporate debt, corporate risk and firm-level investment, using a sample of 25,000 listed companies across 47 countries over the last two decades. We find higher leverage reduces investment but show the effect varies with risk, as measured by firm time-varying distance to default. Firms with higher market valuations and lower volatility do not suffer a debt overhang at all, while the effect is exacerbated for riskier firms. Debt overhang effects worsen significantly in economic crises, and the effects may persist for two to three years after the shock. Given the rise in corporate leverage observed during the last decade and as a result of the Covid-19 pandemic, physical investment is expected to remain at low levels for some years to come, with impacts varying considerably depending on the economic sector and other risk determinants.

Keywords: Firm Investment; Corporate Risk (search for similar items in EconPapers)
JEL-codes: E22 F34 G32 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:12422

DOI: 10.18235/0004464

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