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Title: Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

Author(s): Sebnem Kalemli-Ozcan, Luc Laeven and David Moreno

Publication Date: November 2018

Keyword(s): Bank-Sovereign Nexus, debt maturity, Firm Investment and Rollover Risk

Programme Area(s): Financial Economics, International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: We quantify the role of financial leverage behind the sluggish post-crisis investment performance of European firms. We use a cross-country firm-bank matched database to identify separate roles for firm leverage, bank balance sheet weaknesses arising from sovereign risk, and aggregate demand conditions. We find that firms with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries with sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain 40 percent of the cumulative decline in aggregate investment over four years after the crisis.

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Bibliographic Reference

Kalemli-Ozcan, S, Laeven, L and Moreno, D. 2018. 'Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13336