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Corporate debt booms, financial constraints, and the investment nexus

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  • Bruno Albuquerque

    (Bank of England and FEUC)

Abstract

Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-levelpanel over 1985Q1-2019Q1, I find that debt overhang leads financially vulnerable firms to cutpermanently back on investment: a 10 p.p. increase in the three-year change in the leverageratio is associated with lower investment growth of 5 p.p. after five years compared to the mostresilient firms. I also find that vulnerable firms experience weaker intangible capital growth inthe aftermath of debt booms. Finally, I find that general equilibrium effects dominate, stressingthe risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.

Suggested Citation

  • Bruno Albuquerque, 2021. "Corporate debt booms, financial constraints, and the investment nexus," CeBER Working Papers 2021-08, Centre for Business and Economics Research (CeBER), University of Coimbra.
    • Handle: RePEc:gmf:papers:2021-08
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    Cited by:

    1. Òscar Jordà & Martin Kornejew & Moritz Schularick & Alan M Taylor, 2022. "Zombies at Large? Corporate Debt Overhang and the Macroeconomy," Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4561-4586.
    2. Moritz Schularick, 2021. "Corporate indebtedness and macroeconomic stabilisation from a long-term perspective," ECONtribute Policy Brief Series 024, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    IFRS 9; IAS 39; CECL; credit risk; transition matrices; stochastic simulation.;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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