Corporate debt booms, financial constraints, and the investment nexus

Bruno Albuquerque

No 2021-08, CeBER Working Papers from Centre for Business and Economics Research (CeBER), University of Coimbra

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-levelpanel over 1985Q1-2019Q1, I find that debt overhang leads financially vulnerable firms to cutpermanently back on investment: a 10 p.p. increase in the three-year change in the leverageratio is associated with lower investment growth of 5 p.p. after five years compared to the mostresilient firms. I also find that vulnerable firms experience weaker intangible capital growth inthe aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressingthe risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.

Keywords: IFRS 9; IAS 39; CECL; credit risk; transition matrices; stochastic simulation. (search for similar items in EconPapers)
JEL-codes: D22 E22 E32 G32 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2021-08
New Economics Papers: this item is included in nep-cfn, nep-cwa and nep-mac
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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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