Drilling and Debt
48 Pages Posted: 24 Mar 2017 Last revised: 22 Aug 2017
Date Written: August 7, 2017
This paper documents a new mechanism through which debt affects the real investment decisions of firms. Using detailed project level data in the oil and gas industry, we find that highly levered firms pull forward project completion at the expense of long run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long run project returns to enhance collateral.
Keywords: Debt, Agency Costs, Investment, Contango
JEL Classification: G31, G32, Q02
Suggested Citation: Suggested Citation