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Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

Author

Listed:
  • Şebnem Kalemli-Özcan
  • Luc Laeven
  • David Moreno
Abstract
We quantify the role of financial leverage behind the sluggish post-crisis investment performance of European firms. We use a cross-country firm-bank matched database to identify separate roles for firm leverage, bank balance sheet weaknesses arising from sovereign risk, and aggregate demand conditions. We find that firms entering the crisis with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries whose banks are weak due to sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is also persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain about 20% of the cumulative decline in aggregate private sector investment over the crisis period.

Suggested Citation

  • Şebnem Kalemli-Özcan & Luc Laeven & David Moreno, 2022. "Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis," Journal of the European Economic Association, European Economic Association, vol. 20(6), pages 2353-2395.
    • Handle: RePEc:oup:jeurec:v:20:y:2022:i:6:p:2353-2395.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvac018
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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