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Debt overhang, credit demand and financial conditions

Author

Listed:
  • Isabel Argimón

    (Banco de España)

  • Irene Roibás

    (Banco de España)

Abstract

The empirical literature on the debt overhang hypothesis has estimated the relationship between investment and leverage at the firm level, which does not allow to disentangle between a firm’s decision not to invest as it is highly indebted and its ability to obtain the necessary resources. Using annual Spanish credit data from the Central Credit Register and non-financial corporations’ annual accounts from the lntegrated Central Balance Sheet Data Office Survey for the period 2004-2019, we study the impact of corporate debt on non-financial firms’ demand for bank loans, as a proxy for their willingness to invest. We find a negative relationship between firms’ leverage and demand for bank credit, thus supporting the debt overhang hypothesis. We then study whether such relationship is affected by financial conditions and find that a reduction in short-term interest rates mitigates the effect of firms’ leverage on demand for credit.

Suggested Citation

  • Isabel Argimón & Irene Roibás, 2023. "Debt overhang, credit demand and financial conditions," Working Papers 2308, Banco de España.
    • Handle: RePEc:bde:wpaper:2308
    DOI: https://doi.org/10.53479/29530
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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/23/Files/dt2308e.pdf
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    References listed on IDEAS

    as
    1. Borensztein,Eduardo R. & Ye,Lei Sandy, 2018. "Corporate debt overhang and investment : firm-level evidence," Policy Research Working Paper Series 8553, The World Bank.
    2. Pablo Ottonello & Thomas Winberry, 2020. "Financial Heterogeneity and the Investment Channel of Monetary Policy," Econometrica, Econometric Society, vol. 88(6), pages 2473-2502, November.
    3. Kristian S. Blickle & João A. C. Santos, 2020. "The Costs of Corporate Debt Overhang Following the COVID-19 Outbreak," Liberty Street Economics 20201201, Federal Reserve Bank of New York.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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