Corporate Debt Booms, Financial Constraints, and the Investment Nexus

Abstract

Does corporate debt overhang affect investment over the medium term? To uncover this causal relationship, I exploit exogenous variation in firms’ long-term debt maturity structure as an instrument for debt changes. I measure debt overhang with a concept of debt accumulation, and combine leverage with liquid assets to capture financial constraints. Using US firm-level data over 1984Q1-2019Q4, I find that debt booms lead financially vulnerable firms to cut permanently on capex and intangibles. General equilibrium effects dominate, stressing the risk that firm-specific debt booms in a subset of firms may spill over to the rest of the economy.

Keywords: Corporate debt booms; Firm investment; Financial constraints; Local projections; Instrumental variable approach

JEL Classification: C36, D22, E22, E32, G32