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Corporate-Debt Overhang and Macroeconomic Expectations
The American Economic Review
Vol. 85, No. 5 (Dec., 1995), pp. 1106-1117
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2950977
Page Count: 12
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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.
The American Economic Review © 1995 American Economic Association