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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All you need is cash

Andreas Joseph, Christiane Kneer, Neeltje van Horen and Jumana Saleheen

Financial crises affect firm growth not only in the short-run, but even more so in the long-run. Some firms permanently gain while others lose and cash is a crucial asset to have when the credit cycle turns. As we show in a new Staff Working Paper, having cash at hand allows firms to continue to invest during the crisis while industry rivals without cash have to divest. This gives cash-rich firms an important competitive edge that not only benefits them during the crisis but that gives them an advantage that lasts way beyond the crisis years.

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