DP15518 Zombies at large? Corporate debt overhang and the macroeconomy

Author(s):	Óscar Jordá, Martin Kornejew, Moritz Schularick, Alan M. Taylor
Publication Date:	December 2020
Keyword(s):	business cycles, Corporate Debt, local projections
JEL(s):	E44, G32, G33, N20
Programme Areas:	Financial Economics, Economic History, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15518

With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy's tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.