Debt dilution and debt overhang
Jungherr, Joachim
Schot, Immo

Fecha: 2018
Resumen: We introduce long-term debt (and a maturity choice) into a standard model of firm financing and investment. This allows us to study two distortions of investment: (1. ) Debt dilution distorts firms’ choice of debt which has an indirect effect on investment; (2. ) Debt overhang directly distorts investment. In a dynamic model of investment, leverage, and debt maturity, we show that the two frictions interact to reduce investment, increase leverage, and increase the default rate. We provide empirical evidence from U. S. firms that is consistent with the model predictions. Using our model, we isolate and quantify the effect of debt dilution and debt overhang. Debt dilution is more important for firm value than debt overhang. Debt overhang can actually increase firm value by reducing debt dilution. The negative effect of debt dilution on investment is about half as strong as that of debt overhang. Eliminating the two distortions leads to an increase in investment equivalent to a reduction in the corporate income tax of 3. 5 percentage points.
Resumen: The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
Nota: Número d'acord de subvenció EC/H2020/649396
Derechos: Aquest document està subjecte a una llicència d'ús Creative Commons. Es permet la reproducció total o parcial, la distribució, la comunicació pública de l'obra i la creació d'obres derivades, fins i tot amb finalitats comercials, sempre i quan es reconegui l'autoria de l'obra original. Creative Commons
Lengua: Anglès.
Colección: Barcelona Graduate School of Economics: ADEMU working paper series
Colección: ADEMU Working Paper Series ; 124
Documento: workingPaper
Materia: Investment ; Debt dilution ; Debt overhang

Adreça alternativa: https://hdl.handle.net/10230/35519


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 Registro creado el 2018-10-23, última modificación el 2018-11-10



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