Research Insights: How Does Debt Affect Corporate Investment in Periods of High Uncertainty?

Investment rates are substantially reduced for firms with higher leverage and higher risk of default. For firms with low risk, higher leverage does not reduce investment; in fact, in these cases we find that higher debt may be associated with higher investment. Economic crises provoke the most problematic debt-overhang problems, and low investment rates can persist for two to three years after the recession has ended.