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Debt Overhang and the Retail Apocalypse

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Abstract

Debt overhang is central for theories of capital structure, yet credible empirical estimates of its effects remain elusive. We study the consequences and mechanisms of debt overhang using exogenous changes in the leverage of commercial retail properties. Identification comes from changes in property values occurring after pre-determined debt rollover dates. We show that debt reduces profitability by impairing property owners' response to negative shocks, reducing the business activity of their remaining retail tenants. For the median property, a 10 percentage point leverage increase causes 22% lower employment, mostly in large retail stores, and overall 15% lower operating income.

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  • Ricardo Correa & Jack Liebersohn & Martin Sicilian, 2022. "Debt Overhang and the Retail Apocalypse," International Finance Discussion Papers 1356, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1356
    DOI: 10.17016/IFDP.2022.1356
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    More about this item

    Keywords

    commercial real estate; debt overhang; capital structure; commercial mortgage-backed securities; retail properties;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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