Corporate debt booms, financial constraints and the investment nexus

51 Pages Posted: 28 Aug 2021

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2021


Does corporate debt overhang affect investment over the medium term? To uncover this association, I measure debt overhang with a concept of debt accumulation or debt boom, and combine leverage with liquid assets to capture financial constraints. Using a large US firm-level panel over 1985 Q1–2019 Q1, I find that debt overhang leads financially vulnerable firms to cut permanently back on investment: a 10 percentage point increase in the three-year change in the leverage ratio is associated with lower investment growth of 5 percentage points after five years compared to the most resilient firms. I also find that vulnerable firms experience weaker intangible capital growth in the aftermath of debt booms. Finally, I find that 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

JEL Classification: D22, E22, E32, G32

Suggested Citation

Albuquerque, Bruno, Corporate debt booms, financial constraints and the investment nexus (August 13, 2021). Bank of England Working Paper No. 935, Available at SSRN: or

Bruno Albuquerque (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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