Corporate debt overhang and investment: firm-level evidence

Eduardo R. Borensztein and Lei Sandy Ye

No 8553, Policy Research Working Paper Series from The World Bank

Abstract: This paper investigates empirically the linkages between corporate debt overhang and investment activity at the firm level for a cross section of large-sized emerging market and developing economies. It analyzes the extent to which investment may be discouraged by high levels of debt that put at risk future profits, as well as firm dimensions that may sharpen the debt-investment link. Using balance sheet data from a broad set of emerging market and developing economy firms, the analysis suggests that corporate debt overhang imposes a sizable effect on investment at the firm level. This linkage is more pronounced for large firms and highly leveraged firms. The analysis also finds evidence of a nonlinear effect, in which debt overhang discourages investment more severely under high levels of indebtedness.

Keywords: Economic Growth; Access to Finance; Construction Industry; Common Carriers Industry; Food&Beverage Industry; Business Cycles and Stabilization Policies; General Manufacturing; Plastics&Rubber Industry; Pulp&Paper Industry; Textiles; Apparel&Leather Industry; Mining&Extractive Industry (Non-Energy) (search for similar items in EconPapers)
Date: 2018-08-15
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Citations: View citations in EconPapers (4)

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