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Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment

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  • Cevik Serhan

    (International Monetary Fund, Washington, DC, USA)

  • Miryugin Fedor

    (George Washington University, Washington, DC, USA)

Abstract

The global economy is in the midst of an unprecedented slump caused by the coronavirus pandemic. This systemic risk like no other at a time of record-breaking debt levels, especially among non-financial firms across the world, could exacerbate corporate vulnerabilities, deepen macro-financial instability, and cause long-lasting damage to economic potential. Using data on more than 3.7 million non-financial firms from 58 countries during the period 1997–2019, we develop a two-pronged approach to investigate the relationship between corporate leverage and fixed investment spending. The empirical analysis, robust to a battery of sensitivity checks, confirm corporate leverage is highly vulnerable to disruptions in profitability and cash flow at the firm level and economic growth at the aggregate level. These findings imply that corporate debt overhang could become a strenuous burden on non-financial firms, especially if the COVID-19 pandemic lingers and global downturn becomes protracted.

Suggested Citation

  • Cevik Serhan & Miryugin Fedor, 2022. "Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment," Review of Economics, De Gruyter, vol. 73(1), pages 79-101, April.
    • Handle: RePEc:lus:reveco:v:73:y:2022:i:1:p:79-101:n:4
    DOI: 10.1515/roe-2021-0026
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    Cited by:

    1. Huneeus, Federico & Kaboski, Joseph & Larrain, Mauricio & Schmukler, Sergio L. & Vera, Mario, 2022. "The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk," CEPR Discussion Papers 17061, C.E.P.R. Discussion Papers.
    2. Hubert Bruslerie & Luminita Enache, 2023. "The dynamics of leverage of newly controlled target firms: evidence after an acquisition," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 411-445, August.

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