The Costs of Corporate Debt Overhang Following the COVID-19 Outbreak

Kristian Blickle and Joao Santos

No 20201201, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Leading up to the COVID-19 outbreak, there were growing concerns about corporate sector indebtedness. High levels of borrowing may give rise to a “debt overhang” problem, particularly during downturns, whereby firms forego good investment opportunities because of an inability to raise additional funding. In this post, we show that firms with high levels of borrowing at the onset of the Great Recession underperformed in the following years, compared to similar—but less indebted—firms. These findings, together with early data on the revenue contractions following the COVID-19 outbreak, suggest that debt overhang during the COVID-recession could lead to an up to 10 percent decrease in growth for firms in industries most affected by the economic repercussions of the battle against the outbreak.

Keywords: debt overhang; COVID-19 (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Date: 2020-12-01
New Economics Papers: this item is included in nep-cfn
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