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Debt Overhang and Investment Efficiency

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  • Barbiero, Francesca
  • Popov, Alexander A.
  • Wolski, Marcin

Abstract

Using a pan-European dataset of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. This effect is robust to controlling for firm fixed effects and for country-sector-time fixed effects. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories highlighting the disciplining role of debt over equity.

Suggested Citation

  • Barbiero, Francesca & Popov, Alexander A. & Wolski, Marcin, 2018. "Debt Overhang and Investment Efficiency," CEPR Discussion Papers 12784, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12784
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    Keywords

    banking crises; Debt overhang; Investment misallocation;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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