The Costs of Corporate Debt Overhang

52 Pages Posted: 12 Oct 2020 Last revised: 21 Oct 2020

See all articles by Kristian Blickle

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York

Date Written: October 7, 2020

Abstract

Firms with debt overhang, measured as total borrowing to cash-flow, experience 2% slower asset growth during ordinary times and up to 3% slower growth during a crisis, compared to similar firms without debt overhang. These patterns extend to a firm's growth in employment and capital expenditures. The effects of debt overhang during the great recession are more pronounced for firms with greater need for external funding, including those that had to refinance during the crisis and those with fewer unused funds in their credit lines. We account for debt-structure endogeneity by showing that overhang correlated with credit line cuts after the failure of a syndicated member bank. The effects of the debt overhang during the great recession, together with early data on the revenue contractions following the COVID-19 outbreak, suggest that the increase in debt overhang could lead to an up to 10% decrease in growth for firms in industries most affected by the economic lock-down.

Keywords: Debt Overhang, Recession, Firm Growth

JEL Classification: G20, G28, G30, G32

Suggested Citation

Blickle, Kristian and Santos, João A. C., The Costs of Corporate Debt Overhang (October 7, 2020). Available at SSRN: https://ssrn.com/abstract=3708502 or http://dx.doi.org/10.2139/ssrn.3708502

Kristian Blickle (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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