Corporate-debt overhang and macroeconomic expectations

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Output type: Journal article

Author list: Lamont O

Publisher: American Economic Association

Publication year: 1995

Journal: American Economic Review (0002-8282)

Volume number: 85

Issue number: 5

Start page: 1106

End page: 1117

Number of pages: 12

ISSN: 0002-8282

eISSN: 1944-7981

Languages: English-Great Britain (EN-GB)

Abstract

One way in which corporate financial structure affects macroeconomic performance is by creating debt overhang. Debt overhang occurs when existing debt deters new investment because the benefits from new investment will go to the existing creditors, not to the new investors. If the economy is booming, debt overhang will not bind because the returns to investing are high. If the economy is stagnant, debt overhang will bind because the returns to investing are low. As a result, high levels of debt can create multiple expectational equilibria in which ''animal spirits'' determine economy activity.

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