Snow and Leverage

38 Pages Posted: 24 Nov 2010 Last revised: 13 May 2014

See all articles by Holger M. Mueller

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Xavier Giroud

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Alex Stomper

Humboldt University of Berlin - School of Business and Economics

Arne Westerkamp

Vienna University of Economics and Business - Department of Accounting and Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 6, 2011

Abstract

Using a sample of highly (over-)leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance (return on assets, net profit margin). In particular, a reduction in leverage leads to a decrease in overhead costs, wages, and input costs, and to an increase in sales. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring. Effectively, Unexpected Snow provides lending banks with the counterfactual of what would have been the ski hotel's operating performance in the absence of strategic default, thus allowing to distinguish between ski hotels that are in distress due to negative demand shocks ("liquidity defaulters") and ski hotels that are in distress due to debt overhang ("strategic defaulters").

Keywords: Debt Overhang, Debt Restructuring, Debt Renegiotiation

JEL Classification: G32, G34

Suggested Citation

Mueller, Holger M. and Giroud, Xavier and Stomper, Alex and Westerkamp, Arne, Snow and Leverage (June 6, 2011). Available at SSRN: https://ssrn.com/abstract=1713883 or http://dx.doi.org/10.2139/ssrn.1713883

Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

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Xavier Giroud

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://www.columbia.edu/~xg2285/

National Bureau of Economic Research (NBER) ( email )

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United States

Centre for Economic Policy Research (CEPR) ( email )

London
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Alex Stomper

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Arne Westerkamp

Vienna University of Economics and Business - Department of Accounting and Finance ( email )

Nordbergstraße 15, Bauteil B, 6. Stock
Wien 1090
Austria

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