Take Action

Home | Faculty & Research Overview | Research

Research Details

Can the Cure Kill the Patient? Corporate Credit Interventions and Debt Overhang

Abstract

Business credit programs (BCPs) are an important component of the public policy response to the recent recession. We develop and estimate a model to quantify the impact of BCPs on corporate leverage and investment. Our framework highlights the potential debt overhang effects of BCPs. Following a real shock, if private capital markets continue functioning normally, BCPs incentivize firms to take on too much leverage, leading to underinvestment in the recovery. However, if the shock is accompanied by a sudden stop in private capital markets, BCPs help limit the output losses caused by forced liquidations. Quantitatively, we show that this positive "level" effect outweighs the milder negative "growth" effects of debt overhang among surviving firms. Alternative designs (like equity injections) create only small gains over a simple loan program.

Type

Working Paper

Author(s)

Nicolas Crouzet, Fabrice Tourre

Date Published

2020

Citations

Crouzet, Nicolas, and Fabrice Tourre. 2020. Can the Cure Kill the Patient? Corporate Credit Interventions and Debt Overhang.

LINK
KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action