Tag: Debt overhang

Debt and investment: what can we learn from SMEs’ investment behaviour during and after the Global Financial Crisis?

Mai Daher and Christiane Kneer

Many UK firms weathered the Covid shock by taking on debt. Small and medium-sized enterprises (SMEs) in particular borrowed at an unprecedented rate and their debt increased by around a quarter since end-2019. But debt that allowed SMEs to survive the pandemic could now hamper the recovery as indebted firms may struggle to invest and grow. Debt on SMEs’ balance sheets could also make firms more vulnerable to future shocks and could amplify downturns if indebted firms reduce investment more following shocks. To understand how investment might evolve, our recent FS paper examines how leverage affected SME investment during and after the Global Financial Crisis (GFC) and discusses potential differences given regulatory and other changes since the GFC.

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Weighed down by debt? Revisiting the link between corporate debt overhang and investment

Bruno Albuquerque

Prior to the Covid-19 (Covid) shock hitting the world economy in March 2020, concerns about US corporate debt sustainability were on the radar of the media and policymakers. Corporates had been accumulating debt at a rapid pace, leading to a record-high debt level of 47% of GDP in 2019. To what extent may the accumulation of debt amplify the ongoing crisis, and delay the US recovery? And what can we learn from past episodes of firm-specific debt booms? In a new paper, I revisit these questions using data for a large panel of US firms from the mid-1980s to just before the pandemic. I find that persistent debt booms led financially constrained firms to cut back on investment, across both capital expenditures and intangible assets.

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