Asset Overhang and Technological Change

Abstract

Investors face reduced incentives to finance projects that devalue their legacy investments. We formalize this "asset overhang" and study its drivers. We apply our framework to the climate-banking nexus, where the net-zero transition effectively poses a dilemma for banks: while environmental innovation can be profitable, its widespread dissemination risks disrupting the value of legacy positions. Using granular firm-level data on innovation and diffusion of environmental goods & services, we document the presence of asset overhang as innovators (diffusors) of disruptive environmental technologies are approximately 4.4 p.p. (1.0 p.p) less likely to receive bank credit compared to non-disruptive counterparts. Individual investors with less legacy positions at risk mitigate the economywide asset overhang problem, thereby facilitating technological transition.

Keywords: Financial intermediation, Technological change, Innovation, Diffusion, Credit Rationing, Climate change

JEL Classification: G21, G32, Q54, Q55