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Corporate debt overhang and investment : firm-level evidence

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  • Borensztein,Eduardo R.
  • Ye,Lei Sandy

Abstract

This paper investigates empirically the linkages between corporate debt overhang and investment activity at the firm level for a cross section of large-sized emerging market and developing economies. It analyzes the extent to which investment may be discouraged by high levels of debt that put at risk future profits, as well as firm dimensions that may sharpen the debt-investment link. Using balance sheet data from a broad set of emerging market and developing economy firms, the analysis suggests that corporate debt overhang imposes a sizable effect on investment at the firm level. This linkage is more pronounced for large firms and highly leveraged firms. The analysis also finds evidence of a nonlinear effect, in which debt overhang discourages investment more severely under high levels of indebtedness.

Suggested Citation

  • Borensztein,Eduardo R. & Ye,Lei Sandy, 2018. "Corporate debt overhang and investment : firm-level evidence," Policy Research Working Paper Series 8553, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8553
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    Citations

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    Cited by:

    1. Zhang, Dongna & Zhao, Zuoxiang & Lau, Chi Keung Marco, 2022. "Sovereign ESG and corporate investment: New insights from the United Kingdom," Technological Forecasting and Social Change, Elsevier, vol. 183(C).
    2. Isabel Argimón & Irene Roibás, 2023. "Debt overhang, credit demand and financial conditions," Working Papers 2308, Banco de España.
    3. Bukalska Elżbieta & Skibińska-Fabrowska Ilona, 2023. "Corporate Investment in Bank-Dependent Companies in Crisis Time," Central European Economic Journal, Sciendo, vol. 10(57), pages 1-22, January.
    4. Strauss, Ilan & Yang, Jangho, 2021. "Slowing investment rates in developing economies: Evidence from a Bayesian hierarchical model," International Review of Financial Analysis, Elsevier, vol. 77(C).

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