Working Paper: NBER ID: w28197
Authors: Scar Jord; Martin Kornejew; Moritz Schularick; Alan M. Taylor
Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near- universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.
Keywords: corporate debt; debt overhang; macroeconomy; zombie firms
JEL Codes: E44; G32; G33; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate debt overhang (G32) | macroeconomic outcomes (E66) |
| legal origins (K15) | reorganization frictions (L29) |
| reorganization frictions (L29) | macroeconomic outcomes (E66) |
| corporate debt booms (G32) | investment (G31) |
| corporate debt booms (G32) | output (C67) |
| corporate debt booms (G32) | recovery periods (C41) |
| high debt levels (F34) | recession trajectories (F44) |
| corporate debt restructuring (G33) | efficient outcomes (D61) |
| institutional frictions (D02) | debt overhang problems (F34) |