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

Author(s): Sebnem Kalemli-Özcan, Luc Laeven, David Moreno
Publication Date: 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 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.