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Corporate debt booms, financial constraints and the investment nexus
How does corporate debt overhang affect investment growth? This long-standing question goes back to the seminal paper by Myers (1977). His hypothesis was that a highly leveraged firm is unable to raise additional debt to finance new projects, as the profits are appropriated by existing debt holders, not potential new investors. Similarly, in the presence of default risk, there may be underinvestment in projects with positive net present value, because equity holders do not benefit in case of default.1 Several years later, the literature started to place the focus on the relationship between the level of firm leverage ... (full story)