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SME recovery following a financial crisis: Does debt overhang matter?

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  • Lawless, Martina
  • O’Connell, Brian
  • O’Toole, Conor

Abstract

The years before the financial crisis saw a dramatic build-up in private debt levels in several countries and this increase was particularly marked in Ireland. In this paper, we look at whether outstanding debt taken out by small and medium sized enterprises in Ireland constrains current performance following the financial crisis. We find that higher debt burdens (measured as the ratio of debt-to-turnover) have significant negative effects on all measures of firm performance, in particular investment, employment and indicators of financial distress. We find the effects are greatest for sectors and enterprises most reliant on domestic demand which collapsed following the crisis. The effects are also strongest for enterprises that were in the mid-lifecycle, gearing phase, prior to the crisis.

Suggested Citation

  • Lawless, Martina & O’Connell, Brian & O’Toole, Conor, 2015. "SME recovery following a financial crisis: Does debt overhang matter?," Journal of Financial Stability, Elsevier, vol. 19(C), pages 45-59.
    • Handle: RePEc:eee:finsta:v:19:y:2015:i:c:p:45-59
    DOI: 10.1016/j.jfs.2015.05.002
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    Cited by:

    1. McQuinn, Kieran & O'Toole, Conor & Allen-Coghlan, Matthew & Coffey, Cathal, 2020. "Quarterly Economic Commentary, Autumn 2020," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC2020AUT, June.
    2. Cantillon, Leona & Gargan, Eric & Kren, Janez & Lawless, Martina & O'Toole, Conor, 2022. "Recent trends in SME investment in Ireland: exploring the pandemic and barriers to growth," Research Series, Economic and Social Research Institute (ESRI), number SUSTAT113, June.
    3. Kren, Janez & Lawless, Martina & O'Toole, Conor, 2021. "Cost of doing business during COVID-19: SME investment in public health compliance," Papers WP701, Economic and Social Research Institute (ESRI).
    4. Mascia, Danilo V. & Rossi, Stefania P.S., 2017. "Is there a gender effect on the cost of bank financing?," Journal of Financial Stability, Elsevier, vol. 31(C), pages 136-153.
    5. Min Bai & Samir Harith, 2023. "Measuring SMEs Risk – Evidence from Malaysia," SN Business & Economics, Springer, vol. 3(7), pages 1-32, July.
    6. Lawless, Martina & Martinez-Cillero, Maria & O'Toole, Conor, 2021. "SME investment determinants and financing constraints: A stochastic frontier approach," Papers WP699, Economic and Social Research Institute (ESRI).
    7. McQuinn, John & McCann, Fergal, 2017. "The financial vernerability of Irish Small and Medium Enterprises, 2013 to 2017," Economic Letters 14/EL/17, Central Bank of Ireland.
    8. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    9. O’Toole, Conor & Hennessy, Thia, 2015. "Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture," Food Policy, Elsevier, vol. 56(C), pages 67-75.
    10. Mingjin Luo & Shenqguan Wang, 2023. "Financialization and sluggish recovery of firms' investment: Global evidence from the 2007–2008 financial crisis," International Finance, Wiley Blackwell, vol. 26(3), pages 344-363, December.
    11. Iman Cheratian & Saleh Goltabar & Mohammad Reza Farzanegan, 2022. "Survival Strategies under Sanctions: Firm-Level Evidence from Iran," CESifo Working Paper Series 9568, CESifo.
    12. Jin, Yuying & Luo, Mingjin & Wan, Chao, 2018. "Financial constraints, macro-financing environment and post-crisis recovery of firms," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 54-67.
    13. McQuinn, John, 2019. "SME access to finance in Europe: structural change and the legacy of the crisis," Research Technical Papers 10/RT/19, Central Bank of Ireland.
    14. Afzali, Mansoor & Ҫolak, Gönül & Fu, Mengchuan, 2021. "Economic uncertainty and corruption: Evidence from public and private firms," Journal of Financial Stability, Elsevier, vol. 57(C).
    15. McQuinn, Kieran & O’Toole, Conor & Economides, Philip, 2018. "Quarterly Economic Commentary, Autumn 2018," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC, June.
    16. Lawless, Martina & O’Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).
    17. Martinez-Cillero, Maria & Lawless, Martina & O'Toole, Conor, 2023. "Analysing SME investment, financing constraints and its determinants. A stochastic frontier approach," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 578-588.
    18. Eggers, Fabian, 2020. "Masters of disasters? Challenges and opportunities for SMEs in times of crisis," Journal of Business Research, Elsevier, vol. 116(C), pages 199-208.
    19. Nir Klein, 2016. "Corporate Sector Vulnerabilities in Ireland," IMF Working Papers 2016/211, International Monetary Fund.

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    More about this item

    Keywords

    Financial crises; SMEs; Debt overhang; Recovery; Financial distress;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G01 - Financial Economics - - General - - - Financial Crises

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