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(Debt) Overhang: Evidence from Resource Extraction
[Leverage and investment in diversified firms]

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  • Michael D Wittry

Abstract

I study the empirical importance of debt overhang using a unique data set on resource extraction firms that provides ex ante measures of investment opportunities and important variation in terms of a firm’s obligations. In particular, unsecured reclamation liabilities create overhang that is costly to resolve and induces firms to forgo and postpone positive NPV investments. Traditional debt, in contrast, imposes few overhang-related investment distortions. These results show that (a) the overhang problem is potentially large and more broadly applies to firms’ nondebt liabilities and (b) overhang problems associated with traditional debt can be avoided through contracting and debt composition.

Suggested Citation

  • Michael D Wittry, 2021. "(Debt) Overhang: Evidence from Resource Extraction [Leverage and investment in diversified firms]," The Review of Financial Studies, Society for Financial Studies, vol. 34(4), pages 1699-1746.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:4:p:1699-1746.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa070
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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