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

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May 2023
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.