Corporate Debt and Investment in the Post-Covid World

Accesible PDF image
Peer Reviewed icon Peer Reviewed
Date issued
Sep 2022
Subject
Small Business;
Corporate Debt;
Rating;
Coronavirus;
Economy;
Investment;
Economic Recession
JEL code
E22 - Investment • Capital • Intangible Capital • Capacity;
F34 - International Lending and Debt Problems;
G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
Category
Working Papers
We study the relationship between corporate debt, corporate risk and firm-level investment, using a sample of 25,000 listed companies across 47 countries over the last two decades. We find higher leverage reduces investment but show the effect varies with risk, as measured by firm time-varying distance to default. Firms with higher market valuations and lower volatility do not suffer a debt overhang at all, while the effect is exacerbated for riskier firms. Debt overhang effects worsen significantly in economic crises, and the effects may persist for two to three years after the shock. Given the rise in corporate leverage observed during the last decade and as a result of the Covid-19 pandemic, physical investment is expected to remain at low levels for some years to come, with impacts varying considerably depending on the economic sector and other risk determinants.
Generative AI enabled