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Corporate Debt and Investment in the Post-Covid World

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  • Heresi, Rodrigo
  • Powell, Andrew

Abstract

We study the relationship between corporate debt, corporate risk and firm-level investment, using a sample of 25,000 listed companies across 47 countries over the last two decades. We find higher leverage reduces investment but show the effect varies with risk, as measured by firm time-varying distance to default. Firms with higher market valuations and lower volatility do not suffer a debt overhang at all, while the effect is exacerbated for riskier firms. Debt overhang effects worsen significantly in economic crises, and the effects may persist for two to three years after the shock. Given the rise in corporate leverage observed during the last decade and as a result of the Covid-19 pandemic, physical investment is expected to remain at low levels for some years to come, with impacts varying considerably depending on the economic sector and other risk determinants.

Suggested Citation

  • Heresi, Rodrigo & Powell, Andrew, 2022. "Corporate Debt and Investment in the Post-Covid World," IDB Publications (Working Papers) 12422, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:12422
    DOI: http://dx.doi.org/10.18235/0004464
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    References listed on IDEAS

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    More about this item

    Keywords

    Firm Investment; Corporate Risk;

    JEL classification:

    • 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
    • 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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