(Debt) Overhang: Evidence from Resource Extraction
Charles A. Dice Center Working Paper No. 2019-03-031
Review of Financial Studies, 34(4), 1699-1746, April 2021.
63 Pages Posted: 9 Dec 2019 Last revised: 12 Apr 2021
Date Written: May 1, 2020
I study the empirical importance of debt overhang using a unique dataset on resource extraction firms, which provides ex ante measures of investment opportunities and important variation in the terms of a firm's obligations. In particular, unsecured reclamation liabilities create overhang that is costly to resolve and induces firms to forgo and postpone positive NPV investments. Traditional debt, in contrast, imposes few overhang-related investment distortions. These results show that: (i) the overhang problem is potentially large and applies more broadly to a firm's non-debt liabilities; and (ii) overhang problems associated with traditional debt can be avoided through contracting and debt composition.
Keywords: debt overhang, underinvestment, reclamation liability, general liability overhang
JEL Classification: D22, G30, G32
Suggested Citation: Suggested Citation