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Is Corporate Indebtedness a Drag on Investment After Financial Shocks?

Author

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  • Ibrahim Yarba

Abstract

Using a novel firm-level dataset, this paper examines whether elevated corporate indebtedness holds back investment in the aftermath of a large financial shock such as the one experienced in Turkey in 2018. The results of the difference in differences model reveal that high-indebted firms reduce their investments significantly compared to low-indebted firms. This suggests that high debt remained on corporate balance sheets seems to become a substantial impediment to investment growth. Results also reveal that the detrimental impact of high financial leverage seems to be valid only for SMEs but not for large firms. Moreover, the impact is more pronounced for non-exporters and young firms, and firms with high cash holdings could attenuate the adverse impact of high indebtedness. Findings of this paper highlight the importance of policies that deepen the capital markets and make equity financing more attractive.

Suggested Citation

  • Ibrahim Yarba, 2022. "Is Corporate Indebtedness a Drag on Investment After Financial Shocks?," Working Papers 2203, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2203
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en/main+menu/publications/research/working+paperss/2022/22-03
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    More about this item

    Keywords

    Corporate debt; Financial shocks; Firm investment; Debt overhang; Cash policy; SMEs;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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