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Drilling and Debt

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  • ERIK P. GILJE
  • ELENA LOUTSKINA
  • DANIEL MURPHY

Abstract

This paper documents a previously unrecognized debt‐related investment distortion. Using detailed project‐level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long‐run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long‐run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations.

Suggested Citation

  • Erik P. Gilje & Elena Loutskina & Daniel Murphy, 2020. "Drilling and Debt," Journal of Finance, American Finance Association, vol. 75(3), pages 1287-1325, June.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:3:p:1287-1325
    DOI: 10.1111/jofi.12884
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    2. Auerbach, Alan J. & Gorodnichenko, Yuriy & Murphy, Daniel, 2021. "Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy," European Economic Review, Elsevier, vol. 137(C).
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    5. Evan Herrnstadt & Ryan Kellogg & Eric Lewis, 2024. "Drilling Deadlines and Oil and Gas Development," Econometrica, Econometric Society, vol. 92(1), pages 29-60, January.
    6. Baumeister, Christiane, 2021. "Measuring Market Expectations," CEPR Discussion Papers 16520, C.E.P.R. Discussion Papers.

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