Drilling and Debt

91 Pages Posted: 24 Mar 2017 Last revised: 29 Aug 2019

See all articles by Erik Gilje

Erik Gilje

University of Pennsylvania - The Wharton School

Elena Loutskina

University of Virginia - Darden School of Business

Daniel Murphy

University of Virginia - Darden School of Business

Date Written: August 13, 2019

Abstract

This paper documents a previously unrecognized debt-related investment distortion. Using detailed project-level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early 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 values and, by extension, mitigate lending frictions at debt renegotiations.

Keywords: Debt, Agency Costs, Investment, Contango

JEL Classification: G31, G32, Q02

Suggested Citation

Gilje, Erik and Loutskina, Elena and Murphy, Daniel, Drilling and Debt (August 13, 2019). Darden Business School Working Paper No. 2939603; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2939603 or http://dx.doi.org/10.2139/ssrn.2939603

Erik Gilje

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Elena Loutskina

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Daniel Murphy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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