(Debt) Overhang: Evidence from Resource Extraction

Fisher College of Business Working Paper No. 2019-03-031

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

See all articles by Michael D. Wittry

Michael D. Wittry

Ohio State University (OSU) - Department of Finance

Date Written: May 1, 2020

Abstract

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

Wittry, Michael D., (Debt) Overhang: Evidence from Resource Extraction (May 1, 2020). Fisher College of Business Working Paper No. 2019-03-031, Charles A. Dice Center Working Paper No. 2019-03-031, Review of Financial Studies, 34(4), 1699-1746, April 2021., Available at SSRN: https://ssrn.com/abstract=3497931 or http://dx.doi.org/10.2139/ssrn.3497931

Michael D. Wittry (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

854 Fisher Hall
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Columbus, OH 43210-1144
United States
614-292-3217 (Phone)

HOME PAGE: http://fisher.osu.edu/people/wittry.2

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