Is Corporate Indebtedness a Drag on Investment After Financial Shocks?

Ibrahim Yarba

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: Using a novel firm-level dataset, this paper examines whether elevated corporate indebtedness holds back investment in the aftermath of a large financial shock such as the one experienced in Turkey in 2018. The results of the difference in differences model reveal that high-indebted firms reduce their investments significantly compared to low-indebted firms. This suggests that high debt remained on corporate balance sheets seems to become a substantial impediment to investment growth. Results also reveal that the detrimental impact of high financial leverage seems to be valid only for SMEs but not for large firms. Moreover, the impact is more pronounced for non-exporters and young firms, and firms with high cash holdings could attenuate the adverse impact of high indebtedness. Findings of this paper highlight the importance of policies that deepen the capital markets and make equity financing more attractive.

Keywords: Corporate debt; Financial shocks; Firm investment; Debt overhang; Cash policy, SMEs (search for similar items in EconPapers)
JEL-codes: C23 D22 E22 G31 G32 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ara, nep-cfn, nep-fle, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2203

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