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Debt overhang, rollover risk, and corporate investment: Evidence from the European crisis

Sebnem Kalemli-Ozcan, Luc Laeven, David Moreno, (2019), “Debt overhang, rollover risk, and corporate investment: Evidence from the European crisis”,, 15 January

We argue that the maturity structure of corporate debt is crucial in understanding the effect of debt on firm-level investment. If the debt accumulated during the boom years is mostly short-term – i.e. its remaining maturity is less than one year – there is an increase in the ‘rollover risk’ associated with such debt. This is because lenders are often unwilling to renew expiring credit lines during a crisis, when collateral values drop.

To estimate the effect of debt overhang on firm investment, it is also important to separate reduced credit supply by banks from the role played by firm indebtedness. We match our firms to their banks to consider how the debt overhang and rollover risk effects interact with weak credit supply from banks in a period of tightened lending conditions.

During the European sovereign debt crisis, lending conditions deteriorated because of weak bank balance sheets with high levels of exposure to risky sovereign debt (Gennaioli et al. 2014, Becker and Ivashina 2018). As a result, banks might cut lending to all firms regardless of their financial positions, such as the level and maturity structure of their debt. To distinguish the impact of weak credit supply from financial frictions arising from leverage and maturity structure of the firm’s debt, our analysis therefore considers the sovereign risk exposure of banks as a measure of bank weakness.

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