DP13336 Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

Author(s): Sebnem Kalemli-Ozcan
Publication Date: November 2018
Date Revised: November 2018
Keyword(s): Bank-Sovereign Nexus, debt maturity, Firm Investment, Rollover Risk
JEL(s): E0, F0
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13336

We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment.