Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

We quantify the role of financial factors that have contributed to sluggish investment in Eu- rope in the aftermath of the 2008–2009 crisis. Using a big data approach, we match the firms to their banks based on banking relationships in 8 European countries over time, obtaining over 2 million observations. We document four stylized facts. First, the decline in invest- ment in the aftermath of the crisis can be linked to higher leverage, increased debt service, and having a relationship with a weak bank—once we condition on aggregate demand shocks. Second, the relation between leverage and investment depends on the maturity structure of debt: firms with a higher share of long-term debt have higher investment rates relative to firms with a lower share of long-term debt since the rollover risk for the former is lower and the latter is higher. Third, the negative effect of leverage is more pronounced when firms are linked to weak banks, i.e., banks with high exposure to sovereign risk. Firms with higher shares of short-term debt decrease investment more relative to firms with lower shares of short-term debt even both set of firms linked to weak banks. This result suggests that loan evergreening by weak banks played a limited role in increasing investment. Fourth, the direct negative effect of weak banks on the average firm’s invest- ment disappears once demand shocks are controlled for, although the differential effects with respect to leverage and the maturity of debt remain.