scholarly journals Zombies at Large? Corporate Debt Overhang and the Macroeconomy

2020 ◽  
pp. 1.000-46.000
Author(s):  
Òscar Jordà ◽  
◽  
Martin Kornejew ◽  
Moritz Schularick ◽  
Alan M. Taylor ◽  
...  
Keyword(s):  
Business Cycles ◽  
Financial Distress ◽  
Corporate Debt ◽  
Economic Costs ◽  
Debt Overhang ◽  
Credit Booms ◽  
Long Run ◽  
Modern Business ◽  
Cross Country ◽  
Local Projections

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 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.

scholarly journals Zombies at Large? Corporate Debt Overhang and the Macroeconomy

2021 ◽  
Author(s):  
Òscar Jordà ◽  
◽  
Martin Kornejew ◽  
Moritz Schularick ◽  
Alan Taylor ◽  
...  
Keyword(s):  
Corporate Bonds ◽  
Bank Loans ◽  
Corporate Debt ◽  
Legal Tradition ◽  
Debt Overhang ◽  
Credit Booms ◽  
Debt Renegotiation ◽  
The Past ◽  
Advanced Economies ◽  
Household Credit

What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on nonfinancial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.

scholarly journals Debt Maturity and the Dynamics of Leverage

2021 ◽  
Author(s):  
Thomas Dangl ◽  
Josef Zechner
Keyword(s):  
Transaction Costs ◽  
Financial Distress ◽  
Cash Flows ◽  
Debt Maturity ◽  
Corporate Debt ◽  
Short Term ◽  
Trade Off ◽  
Maturity Structure

Abstract This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transaction costs since larger amounts of expiring debt need to be refinanced. We show that this trade-off between higher expected transaction costs against the commitment to reduce leverage in low-profitability states motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Evidence supports the model’s predictions.

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices

2009 ◽  
Vol 44 (3) ◽  
pp. 551-578 ◽  
Author(s):  
Alexei V. Ovtchinnikov ◽  
John J. McConnell
Keyword(s):  
Capital Markets ◽  
Stock Prices ◽  
Financial Distress ◽  
Stock Price ◽  
Debt Overhang ◽  
Capital Market Imperfections ◽  
Investment Opportunities ◽  
Imperfect Capital Markets ◽  
Empirical Tests ◽  
External Equity

AbstractPrior studies argue that investment by undervalued firms that require external equity is particularly sensitive to stock prices in irrational capital markets. We present a model in which investment can appear to be more sensitive to stock prices when capital markets are rational, but subject to imperfections such as debt overhang, information asymmetries, and financial distress costs. Our empirical tests support the rational (but imperfect) capital markets view. Specifically, investment–stock price sensitivity is related to firm leverage, financial slack, and probability of financial distress, but is not related to proxies for firm undervaluation. Because, in our model, stock prices reflect the net present values (NPVs) of investment opportunities, our results are consistent with rational capital markets improving the allocation of capital by channeling more funds to firms with positive NPV projects.

scholarly journals The Debt Overhang Hypothesis: Evidence from Pakistan

2016 ◽  
Vol 11 (1) ◽  
pp. 140-151 ◽  
Author(s):  
Muhammad Imran Shah ◽  
Irfan Ullah ◽  
Zia Ur Rahman ◽  
Nadeem Jan
Keyword(s):  
Economic Growth ◽  
Dynamic Behaviour ◽  
Negative Impact ◽  
Labour Force ◽  
External Debt ◽  
Unit Roots ◽  
Debt Overhang ◽  
Debt Burden ◽  
Long Run ◽  
Domestic Labour

AbstractThis study investigates the debt overhang hypothesis for Pakistan in the period 1960-2007. The study examines empirically the dynamic behaviour of GDP, debt services, the employed labour force and investment using the time series concepts of unit roots, cointegration, error correlation and causality. Our findings suggest that debt-servicing has a negative impact on the productivity of both labour and capital, and that in turn has adversely affected economic growth. By severely constraining the ability of the country to service debt, this lends support to the debt-overhang hypothesis in Pakistan. The long run relation between debt services and economic growth implies that future increases in output will drain away in form of high debt service payments to lender country as external debt acts like a tax on output. More specifically, foreign creditors will benefit more from the rise in productivity than will domestic producers and labour. This suggests that domestic labour and capital are the ultimate losers from this heavy debt burden.

Linkages between cross-country business cycles, cross-country stock market cycles and cross-country real estate market cycles

2016 ◽  
Vol 9 (2) ◽  
pp. 123-146 ◽  
Author(s):  
Kim Hiang Liow
Keyword(s):  
Real Estate ◽  
Stock Market ◽  
Business Cycles ◽  
Spillover Effects ◽  
Real Estate Market ◽  
Stock Market Index ◽  
Content Type ◽  
Market Index ◽  
Cross Country ◽  
The Cross

Purpose This research aims to investigate whether and to what extent the co-movements of cross-country business cycles, cross-country stock market cycles and cross-country real estate market cycles are linked across G7 from February 1990 to June 2014. Design/methodology/approach The empirical approaches include correlation analysis on Hodrick–Prescott (HP) cycles, HP cycle return spillovers effects using Diebold and Yilmaz’s (2012) spillover index methodology, as well as Croux et al.’s (2001) dynamic correlation and cohesion methodology. Findings There are fairly strong cycle-return spillover effects between the cross-country business cycles, cross-country stock market cycles and cross-country real estate market cycles. The interactions among the cross-country business cycles, cross-country stock market cycles and cross-country real estate market cycles in G7 are less positively pronounced or exhibit counter-cyclical behavior at the traditional business cycle (medium-term) frequency band when “pure” stock market cycles are considered. Research limitations/implications The research is subject to the usual limitations concerning empirical research. Practical implications This study finds that real estate is an important factor in influencing the degree and behavior of the relationship between cross-country business cycles and cross-country stock market cycles in G7. It provides important empirical insights for portfolio investors to understand and forecast the differential benefits and pitfalls of portfolio diversification in the long-, medium- and short-cycle horizons, as well as for research studying the linkages between the real economy and financial sectors. Originality/value In adding to the existing body of knowledge concerning economic globalization and financial market interdependence, this study evaluates the linkages between business cycles, stock market cycles and public real estate market cycles cross G7 and adds to the academic real estate literature. Because public real estate market is a subset of stock market, our approach is to use an original stock market index, as well as a “pure” stock market index (with the influence of real estate market removed) to offer additional empirical insights from two key complementary perspectives.

Corporate Debt Overhang and Credit Policy

2020 ◽  
Vol 2020 (2) ◽  
pp. 447-502
Author(s):  
Markus Brunnermeier ◽  
Arvind Krishnamurthy
Keyword(s):  
Corporate Debt ◽  
Credit Policy ◽  
Debt Overhang

scholarly journals DIAGNOSTICS OF THE PRODUCTION POTENTIAL OF THE ENTERPRISE

2020 ◽  
Author(s):  
Taisiya Voronkova ◽  
◽  
Anastasiia Vovkodav ◽  
Keyword(s):  
Cost Estimation ◽  
Production Management ◽  
Evaluation Criteria ◽  
Original Data ◽  
Production Potential ◽  
Industrial Enterprises ◽  
Long Run ◽  
Modern Business ◽  
Method Of Production ◽  
Definition Of

A market economy requires flexibility in the operation of industrial enterprises, prompt adjustment of the nature and directions of production processes. That is why, in modern business conditions, the importance of not only ensuring the efficiency of economic entities, but also the formation of their potential and prospects for further development. It is proved that some modern industrial enterprises are characterized by the inability to really assess the production potential, incomplete use of available resources, the latest technologies, and modern methods of production management. Production potential has been identified as having several specific characteristics: integrity, interchangeability, interconnection, flexibility, or adaptability. It is noted that the potential concentrates three levels of connections and relationships at the same time: reflects the past, characterizes the present in terms of practical application, future-oriented. Six main methods used in the estimation of production potential are investigated and characterized: economic-statistical, method of production functions, method of cost estimation, index, indicator, and matrix methods. The principles that must be followed when diagnosing the production potential of the enterprise are determined: the completeness of the original data and the universality of the information base; reliability and availability of collected data; the possibility of using two types of assessment of production potential: resource-productive and rating; use of the concept of potential in a certain direction; use of basic and additional indicators; availability of certain evaluation criteria for the main and additional indicators. It is substantiated that the interpretation of the definition of “production potential” is ambiguous, as well as the methods of its evaluation. It is noted that without the study of production potential is not possible strategic development and planning of other activities of the enterprise and the process of managing the production potential of an industrial enterprise is aimed at efficient use of all its resources in the long run.

The long run influence of pension systems on the current account

2019 ◽  
Vol 20 (1) ◽  
pp. 67-101
Author(s):  
Thomas Davoine
Keyword(s):  
Current Account ◽  
Overlapping Generations ◽  
Current Account Balance ◽  
Current Account Surplus ◽  
Pension Systems ◽  
Long Run ◽  
Funded Pensions ◽  
Future Consumption ◽  
Cross Country ◽  
The Current Account

AbstractExplaining cross-country differences in current accounts is difficult. While pay-as-you-go pensions reduce the need to save for retirement, contributions to capital-funded pensions are saved for future consumption. An overlapping-generations analysis shows that capital-funded pensions increase net foreign assets holdings. With a multi-pillar system whose capital-funded part accounts for 18% of pensions, the Austrian current account balance would be 1 percentage point of gross domestic product (GDP) higher than with pure pay-as-you-go pensions in 20 years. By comparison, the Austrian current account surplus averages 1.8% of GDP. Empirically, I find that the current account of high-income countries increases with the coverage and replacement rates of capital-funded pensions.

scholarly journals BUSINESS CYCLE – GROWTH NEXUS: A REVIEW

2015 ◽  
Vol 21 (3) ◽  
pp. 519-538
Author(s):  
Marinko ŠKARE ◽  
Daniel TOMIĆ
Keyword(s):  
Economic Growth ◽  
Business Cycles ◽  
Business Cycle ◽  
Economic Policies ◽  
Empirical Testing ◽  
Long Run ◽  
Cycle Growth ◽  
Complex Process ◽  
Theoretical Reasoning

Frequent reversals in business cycles pose the question whether country can achieve macroeconomic stability and/or economic growth by coordinating its economic policies. Thus, what is the role of economic policy within the short/long run in amplifying or dampening shocks? Business cycle – economic growth relationship is rather ambiguous and has, thus, attracted controversy. In this sense the (dis)belief that there indeed exists a relationship between the economic growth and business cycle, and their long-run convergence brings us to three important hypotheses that: (1) the evaluation of cycle-growth bond is inconclusive, (2) empirical testing of cycle synchronization is exaggerated and (3) the hypothesis of coupling/decoupling is ambiguous and can be misleading. Economic growth is a complex process and cannot be attributed to a single factor of observance hence this essay is just a tool of theoretical reasoning with firm grip on empirical circumstances that lead us to consider some issues that dwell the “growth economists” these days. Our study suggests a conclusion that discussions on the cycle-growth nexus are far from over, revealing us some remarkable confrontations within empirical domain.

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