Speaker: A native of Turkey, Sebnem Kalemli-Ozcan received her BS in Economics from Middle East Technical University in 1995 and her PhD in Economics from Brown University in 2000. Professor Kalemli-Ozcan's main research interests are in international macroeconomics, finance and growth. Her current research focuses on the linkages between real and financial sectors in a globalized economy and the effects of such linkages on economic fluctuations and development.  More >>

Abstract: We find a significant debt overhang effect that leads to sluggish investment in Europe. Firms with higher debt overhang invest less prior to the European crisis and this effect intensified during the crisis. In quantitative terms, debt overhang channel has a bigger role in explaining weak investment relative to weak bank and weak firm balance sheet channels.   Firms, whose main bank is relatively weak do not necessarily show more debt overhang or more sluggish investment. Firms with weak balance sheets invest less both during regular times and the crisis but this effect is smaller than that of debt overhang. Using a pan-European firm-bank matched data set including small firms, we document that the worsening of debt overhang during the crisis can be linked to an increase in sovereign risk in Southern Europe: firms who entered the crisis with higher debt overhang decrease investment relatively more when their sovereign is under stress. We also show that, although during normal times short term debt has a positive association with investment, during the crisis period, this effect becomes less positive, due to an increase in roll over risk, which is positively associated with higher sovereign risk. Worsening debt overhang outside Southern Europe can be explained by general weak demand conditions. Overall, our results show the importance of sovereign risk and lower demand intensifying negative effect of debt overhang on investment via higher uncertainty and lower earnings respectively.

This talk held jointly with the International Monetary Fund.

Last Updated: Mar 02, 2015