Working Paper: CEPR ID: DP13336
Authors: Sebnem Kalemli-Ozcan; 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 with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries with sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain 40 percent of the cumulative decline in aggregate investment over four years after the crisis.
Keywords: firm investment; corporate debt; bank-sovereign nexus
JEL Codes: E22; E32; E44; F34; F36; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher levels of corporate debt (G32) | Reduction in investment rates (G31) |
| Short-term debt (H63) | Reduction in investment rates (G31) |
| Rollover risk (G32) | Influencing investment decisions (G11) |
| Corporate leverage channel (G32) | Cumulative decline in aggregate investment (E22) |
| Firm leverage (G32) | Negative relationship with investment (G31) |
| Debt overhang (H63) | Lasting impact on investment (G11) |