Scarring and corporate debt

Julia Estefania-Flores, Davide Furceri, Pablo Gonzalez-Dominguez, Siddharth Kothari and Nour Tawk

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high-debt firms seeing a larger decline in investment. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28% of the average medium-term decline of investment. This effect is especially larger for: (i) countries with less efficient bankruptcy systems; (ii) during global recessions and firms operating in sectors with higher export dependences; and (iii) firms that are credit-constrained—small and less profitable firms, and those with high share of short-term debt.

Date: 2025
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Working Paper: Scarring and Corporate Debt (2022)
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