Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

43 Pages Posted: 2 May 2018

See all articles by Sebnem Kalemli-Ozcan

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

David Moreno

Central Bank of Chile

Multiple version iconThere are 3 versions of this paper

Date Written: April 2018

Abstract

We quantify the role of financial leverage behind the sluggish post-crisis investment performance of European firms. We use a cross-country firm-bank matched database to identify separate roles for firm leverage, bank balance sheet weaknesses arising from sovereign risk, and aggregate demand conditions. We find that firms with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries with sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain 40 percent of the cumulative decline in aggregate investment over four years after the crisis.

Suggested Citation

Kalemli-Ozcan, Sebnem and Laeven, Luc A. and Moreno, David, Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis (April 2018). NBER Working Paper No. w24555, Available at SSRN: https://ssrn.com/abstract=3170774

Sebnem Kalemli-Ozcan (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koc University, Graduate School of Business ( email )

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Istanbul, 34450
Turkey

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Moreno

Central Bank of Chile ( email )

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