Drilling and Debt

48 Pages Posted: 24 Mar 2017 Last revised: 22 Aug 2017

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 7, 2017

Abstract

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

Gilje, Erik and Loutskina, Elena and Murphy, Daniel, Drilling and Debt (August 7, 2017). Darden Business School Working Paper No. 2939603. 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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