Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/290022 
Year of Publication: 
2022
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1316
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
We study the relationship between corporate debt, corporate risk and firm-level investment, using a sample of 25,000 listed companies across 47 countries over the last two decades. We find higher leverage reduces investment but show the effect varies with risk, as measured by firm time-varying distance to default. Firms with higher market valuations and lower volatility do not suffer a debt overhang at all, while the effect is exacerbated for riskier firms. Debt overhang effects worsen significantly in economic crises, and the effects may persist for two to three years after the shock. Given the rise in corporate leverage observed during the last decade and as a result of the Covid-19 pandemic, physical investment is expected to remain at low levels for some years to come, with impacts varying considerably depending on the economic sector and other risk determinants.
Subjects: 
Firm Investment
Corporate Debt
Corporate Risk
JEL: 
E22
F34
G32
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Working Paper

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