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Debt overhang and investment efficiency

Alexander Popov (), Marcin Wolski and Francesca Barbiero

No 2213, Working Paper Series from European Central Bank

Abstract: Using a pan-European dataset of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is already excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories of the disciplining role of debt, as well as with models highlighting the negative link between agency problems at firms and banks and investment efficiency. JEL Classification: E22, E44, G21, H63

Keywords: banking crises; debt overhang; investment efficiency (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2018-12
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