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Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications

Author

Listed:
  • Ana Martinis

    () (The Croatian National Bank, Croatia)

  • Igor Ljubaj

    () (The Croatian National Bank, Croatia)

Abstract

High corporate sector leverage has often been highlighted as one of the major impediments to economic recovery. We conduct a debt sustainability analysis for Croatian corporates based on firm-level data. The analysis shows that around one third of the corporate debt in Croatia is unsustainable, thus pointing to sizeable deleveraging needs. By relating the estimated firm-level debt overhang indicator with investment activity, we find that over-indebted firms have reduced their investment to a greater extent than those without debt overhang. This especially holds among exporters and domestically owned private companies, whose higher sensitivity to unsustainable debt probably explains why they are less debt burdened. Our paper contributes to the existing literature by showing that, in the case of Croatia, the estimated firm-level debt sustainability thresholds, unlike the aggregate thresholds, capture the asymmetrically negative effect of debt overhang on investment. The estimated size and impact of the debt overhang in Croatia warrant policy engagement that would include more efficient bankruptcy procedures, swifter balance sheet clean-up supported by specific tax treatments, enhanced restructuring of unsustainably indebted state-owned companies as well as a comprehensive policy strategy for improving business climate and competitiveness.

Suggested Citation

  • Ana Martinis & Igor Ljubaj, 2017. "Corporate Debt Overhang in Croatia: Micro Assessment and Macro Implications," Working Papers 51, The Croatian National Bank, Croatia.
  • Handle: RePEc:hnb:wpaper:51
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    File URL: http://www.hnb.hr/repec/hnb/wpaper/pdf/w-051.pdf
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    References listed on IDEAS

    as
    1. Stephanie Lo & Kenneth Rogoff, 2015. "Secular stagnation, debt overhang and other rationales for sluggish growth, six years on," BIS Working Papers 482, Bank for International Settlements.
    2. Manuela Goretti & Marcos R Souto, 2013. "Macro-Financial Implications of Corporate (De)Leveraging in the Euro Area Periphery," IMF Working Papers 13/154, International Monetary Fund.
    3. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis; Estimating Default Risk and Economy-Wide Risk Transfer," IMF Working Papers 04/121, International Monetary Fund.
    5. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    6. Jongsoon Shin, 2017. "Corporate Restructuring and Its Macro Effects," IMF Working Papers 17/17, International Monetary Fund.
    7. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    8. Rodriguez-Palenzuela, Diego & Dées, Stéphane & Andersson, Malin & Bijsterbosch, Martin & Forster, Katrin & Zorell, Nico & Audoly, Richard & Buelens, Christian & Compeyron, Guillaume & Ferrando, Annali, 2016. "Savings and investment behaviour in the euro area," Occasional Paper Series 167, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    corporate debt; investment; debt overhang; deleveraging; crisis; Croatia;

    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
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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