Can the cure kill the patient? Corporate credit interventions and debt overhang

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Event details

Date 08.04.2022 10:3012:00  
Speaker Nicolas Crouzet, Northwestern University, Kellogg School of Management
Location
UniL, Extra 126
Category Conferences - Seminars

Interventions in corporate credit markets were a major innovation in the policy response to the 2020 recession. This paper develops and estimates a model to quantify their impact on borrowing and investment. Even during downturns, credit interventions can be a bad policy idea, because they exacerbate debt overhang and depress investment in the long run. However, if the downturn is accompanied by financial market disruptions, they initially help forestall inefficient liquidations. These short term benefits quantitatively dominate the long run overhang costs. Additionally, constraining shareholder distributions, and targeting high-leverage firms substantially increases the "bang for the buck" of credit interventions.