Working Paper: NBER ID: w24555
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: debt overhang; corporate investment; European crisis; financial leverage; rollover risk
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 debt levels (H63) | reduce investment (G31) |
| higher debt levels (H63) | stronger negative relationship with investment (G31) |
| corporate leverage channel (G32) | explain decline in aggregate investment (E22) |
| high leverage in the periphery (F65) | reduce investment rate (G31) |
| debt overhang effect (G32) | operate independently from aggregate demand (E19) |
| one standard deviation increase in firm leverage (G32) | reduction in investment (G31) |
| moving from minimum to maximum levels of leverage (G19) | decline in investment (E22) |