Working Paper: CEPR ID: DP17507
Authors: Hans Degryse; Tarik Roukny; Joris Tielens
Abstract: Investors face reduced incentives to finance projects that devalue their legacy investments. We formalize this “asset overhang” and study its drivers. We apply our framework to the climate-banking nexus, where the net-zero transition effectively poses a dilemma for banks: while environmental innovation can be profitable, its widespread dissemination risks disrupting the value of legacy positions. Using granular firm-level data on innovation and diffusion of environmental goods & services, we document the presence of asset overhang as innovators(diffusors) of disruptive environmental technologies are approximately 4.4 p.p. (1.0 p.p) less likely to receive bank credit compared to non-disruptive counterparts. Individual investors with less legacy positions at risk mitigate the economywide asset overhang problem, thereby facilitating technological transition.
Keywords: Financial Intermediation; Technological Change; Innovation Diffusion; Credit Rationing; Climate Change
JEL Codes: G21; G32; Q54; Q55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| green innovations (Q55) | bank credit allocation (G21) |
| green diffusion (O44) | bank credit allocation (G21) |
| asset overhang (G32) | credit allocation (E51) |
| negative spillovers from green activities (F64) | banks' assessments of incumbent borrowers (G21) |
| banks' assessments of incumbent borrowers (G21) | probabilities of default (G33) |
| negative spillovers from green activities (F64) | collateral values (D46) |
| asset overhang among investors (G32) | credit supply to disruptive firms (E51) |