DP12784 Debt Overhang and Investment Efficiency

Author(s): Francesca Barbiero, Alexander Popov, Marcin Wolski
Publication Date: March 2018
Keyword(s): banking crises, Debt overhang, Investment misallocation
JEL(s): E22, E44, G21, H63
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12784

Using a pan-European dataset of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. This effect is robust to controlling for firm fixed effects and for country-sector-time fixed effects. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories highlighting the disciplining role of debt over equity.