Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment

Serhan Cevik and Fedor Miryugin

No 2020/287, IMF Working Papers from International Monetary Fund

Abstract: The global economy is in the midst of an unprecedented slump caused by the coronavirus pandemic. This systemic risk like no other at a time of record-breaking debt levels, especially among nonfinancial firms across the world, could exacerbate corporate vulnerabilities, deepen macro-financial instability, and cause long-lasting damage to economic potential. Using data on more than 2.8 million nonfinancial firms from 52 countries during the period 1997–2018, we develop a two-pronged approach to investigate the relationship between corporate leverage and fixed investment spending. The empirical analysis, robust to a battery of sensitivity checks, confirm corporate leverage is highly vulnerable to disruptions in profitability and cash flow at the firm level and economic growth at the aggregate level. These findings imply that corporate debt overhang could become a strenuous burden on nonfinancial firms, especially if the COVID-19 pandemic lingers and global downturn becomes protracted.

Keywords: Corporate debt; leverage; debt overhang; fixed investment; firm-level; WP; nonfinancial firm; firm level; sector peer; investment appetite; empirical inquiry; firm size; firms' behavior; indebted firm (search for similar items in EconPapers)
Pages: 22
Date: 2020-12-18
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (4)

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Journal Article: Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment (2022)
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