Drilling and Debt
91 Pages Posted: 24 Mar 2017 Last revised: 29 Aug 2019
Date Written: August 13, 2019
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: Suggested Citation