Debt dilution and debt overhang
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- dc.contributor.author Jungherr, Joachimca
- dc.contributor.author Schott, Immoca
- dc.date.accessioned 2018-09-27T09:38:20Z
- dc.date.available 2018-09-27T09:38:20Z
- dc.date.issued 2018-05
- dc.description.abstract 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.ca
- dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
- dc.format.mimetype application/pdfca
- dc.identifier.uri http://hdl.handle.net/10230/35519
- dc.language.iso engca
- dc.relation.ispartofseries ADEMU Working Paper Series;124
- dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
- dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.ca
- dc.rights.accessRights info:eu-repo/semantics/openAccessca
- dc.rights.uri https://creativecommons.org/licenses/by/4.0/ca
- dc.subject.other Investmentca
- dc.subject.other Debt dilutionca
- dc.subject.other Debt overhangca
- dc.title Debt dilution and debt overhangca
- dc.type info:eu-repo/semantics/workingPaperca