Corporate debt booms, financial constraints and the investment nexus

Bruno Albuquerque

No 935, Bank of England working papers from Bank of England

Abstract: Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-level panel over 1985 Q1–2019 Q1, I find that debt overhang leads financially vulnerable firms to cut permanently back on investment: a 10 percentage point increase in the three-year change in the leverage ratio is associated with lower investment growth of 5 percentage points after five years compared to the most resilient firms. I also find that vulnerable firms experience weaker intangible capital growth in the aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressing the risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.

Keywords: Corporate debt booms; firm investment; financial constraints; local projections (search for similar items in EconPapers)
JEL-codes: D22 E22 E32 G32 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2021-08-13
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Corporate debt booms, financial constraints, and the investment nexus (2024)
Working Paper: Corporate debt booms, financial constraints, and the investment nexus (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0935

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