DP12784 | Debt Overhang and Investment Efficiency

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Using a pan-European dataset of 8.5 million rms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. This effect is robust to controlling for firm fi xed effects and for country-sector-time fixed effects. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if fi rm debt is excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories highlighting the disciplining role of debt over equity.