Is Corporate Indebtedness a Drag on Investment after Financial Shocks?
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Abstract
Using novel firm-level data covering the universe of all incorporated manufacturing firms in Türkiye, this paper examines whether elevated corporate indebtedness holds back investment in the aftermath of a large financial shock, such as the one experienced in Türkiye in 2018. The results of the difference in differences model reveal that high-indebted firms reduce their investments significantly compared to low-indebted firms. This suggests that high debt remaining on corporate balance sheets seems to become a substantial impediment to investment. Accordingly, loans are found to be decreasing with leverage. The results also show that the detrimental impact of high financial leverage seems to be valid only for SMEs but not for large firms. Moreover, the effect is more pronounced for non-exporters and young firms, and firms with high cash holdings could attenuate the adverse impact of high indebtedness.
JEL Codes: C23, D22, E22, G31, G32
Keywords: Corporate debt; Financial shocks; Firm investment; Debt overhang; Corporate cash policy
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Yarba, İbrahim (2025) “Is Corporate Indebtedness a Drag on Investment after Financial Shocks?”, World Journal of Applied Economics, 11(1), pp. 1-15. doi: 10.22440/wjae.11.1.1.
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References
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Badertscher, B., Shroff, N., & White, H. (2013). Externalities of public firm presence: Evidence from private firms’ investment decisions. Journal of Financial Economics, 109 (3), 682–706. doi:10.1016/j.jfineco.2013.03.012
Berger, A. N., & Udell, G. F. (1992). Some evidence on the empirical significance of credit rationing. Journal of Political Economy, 100 (5), 1047–1077. doi:10.1086/261851
BIS. (2025). Bank for International Settlements Database. Retrieved from https://data.bis.org/
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Cevik, S., & Miryugin, F. (2020). Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment (Working Paper Series, No. 20/287). IMF. https://www.imf.org/en/Publications/WP/Issues/2020/12/18/Leverage-Shocks-Firm-Level-Evidence-on-Debt-Overhang-and-Investment-49965.
Das, S., & Tulin, V. (2017). Financial Frictions, Underinvestment, and Investment Composition: Evidence from Indian Corporates (Working Paper Series, No. 17/134). IMF. https://www.imf.org/en/Publications/WP/Issues/2017/06/08/Financial-Frictions-Underinvestment-and-Investment-Composition-Evidence-from-Indian-44939.
Dittmar, A., & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83 (3), 599–634. doi:10.1016/j.jfineco.2005.12.006
Gebauer, S., Setzer, R., & Westphal, A. (2018). Corporate debt and investment: a firm-level analysis for stressed euro area countries. Journal of International Money and Finance, 86 , 112-130. doi:10.1016/j.jimonfin.2018.04.009
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Harford, J., Klasa, S., & Maxwell, W. F. (2014). Refinancing risk and cash holdings. The Journal of Finance, 69 (3), 975–1012. doi:10.1111/jofi.12133
Iyer, R., Peydro, J., da Rocha-Lopes, S., & Schoar, A. (2014). Interbank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis. The Review of Financial Studies, 27 (1), 347-372. doi:10.1093/rfs/hht056
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
Kalemli-Ozcan, S., Laeven, L., & Moreno, D. (2019). Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis (Working Paper, No. 2241). European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2241∼cbea165b30.en.pdf.
Khwaja, A. I., & Mian, A. (2008). Tracing the impact of bank liquidity shocks: Evidence from an emerging market. The American Economic Review, 48 (4), 1413-1442.
Kose, M. A., Ohnsorge, F., Ye, L., & Islamaj, E. (2017). Weakness in Investment Growth: Causes, Implications and Policy Responses (Policy Research Working Paper, No. 7990). World Bank. https://documents1.worldbank.org/curated/en/267921488463293454/pdf/WPS7990.pdf.
Lamont, O. (1995). Corporate-Debt Overhang and Macroeconomic Expectations. American Economic Review, 85 (5), 1106-1117.
Lang, L., Ofek, E., & Stulz, R. (1996). Leverage, Investment, and Firm Growth. Journal of Financial Economics, 40 (1), 3–29. doi:10.1016/0304-405X(95)00842-3
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McGuinness, G., Hogana, T., & Powell, R. (2018). European trade credit use and SME survival. Journal of Corporate Finance, 49 , 81-103. doi:10.1016/j.jcorpfin.2017.12.005
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53 (3), 443-453.
Mortal, S., & Reisel, N. (2013). Capital Allocation by Public and Private Firms. Journal of Financial and Quantitative Analysis, 48 (1), 77-103. doi:10.1017/S0022109013000057
Mutluer Kurul, D., & Tiryaki, S. T. (2016). How credit-constrained are firms in Turkey? A survey-based analysis. Applied Economics Letters, 23 (6), 420-423. doi:10.1080/13504851.2015.1078439
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5 (2), 147–175. doi:10.1016/0304-405X(77)90015-0
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52 (1), 3–46. doi:10.1016/S0304-405X(99)00003-3
Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A cross-country analysis. The Journal of Finance, 61 (6), 2725–2751. doi:10.1111/j.1540-6261.2006.01003.x
Ross, S. (1977). The Determination of financial structure: the incentive-signalling approach. The Bell Journal of Economics, 8 (1), 23–40. doi:10.2307/3003485
Shin, H. H., & Stulz, R. (1998). Are internal capital markets efficient? Quarterly Journal of Economics, 113 (2), 531-552. doi:10.1162/003355398555676
Stiglitz, J., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review, 71 (3), 393–410.
World Bank. (2017). Global Economic Prospects: Weak Investment in Uncertain Times. doi:10.1596/978-1-4648-1016-9
Yarba, I. (2021). Hidden reserves as an alternative channel of firm finance. Central Bank Review, 21 (2), 39–48. doi:10.1016/j.cbrev.2021.04.001
Yarba, I. (2023). Does the inverted U-shape between corporate indebtedness and investment hold up for emerging markets? Evidence from Turkiye. Borsa Istanbul Review, 23 (Supplement 2), S75-S83. doi:10.1016/j.bir.2023.11.002
Yarba, I., & Guner, Z. N. (2020a). Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy. Empirical Economics, 59 , 2473–2507. doi:10.1007/s00181-019-01705-5
Yarba, I., & Guner, Z. N. (2020b). Uncertainty, macroprudential policies and corporate leverage: firm-level evidence. Central Bank Review, 20 (2), 33–42. doi:10.1016/j.cbrev.2020.03.005
Yarba, I., & Yassa, A. (2022). Does stock market listing boost or impede corporate investment? Borsa Istanbul Review, 22 (2), 285-294. doi:10.1016/j.bir.2021.04.001
Zubair, S., Kabir, R., & Huang, X. (2020). Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research, 110 , 456–463. doi:10.1016/j.jbusres.2020.01.063
Badertscher, B., Shroff, N., & White, H. (2013). Externalities of public firm presence: Evidence from private firms’ investment decisions. Journal of Financial Economics, 109 (3), 682–706. doi:10.1016/j.jfineco.2013.03.012
Berger, A. N., & Udell, G. F. (1992). Some evidence on the empirical significance of credit rationing. Journal of Political Economy, 100 (5), 1047–1077. doi:10.1086/261851
BIS. (2025). Bank for International Settlements Database. Retrieved from https://data.bis.org/
Borensztein, E., & Ye, L. (2021). Corporate debt overhang and investment in emerging economies: Firm-level evidence. International Finance, 24 (1), 18-39. doi:10.1111/infi.12382
Cevik, S., & Miryugin, F. (2020). Leverage Shocks: Firm-Level Evidence on Debt Overhang and Investment (Working Paper Series, No. 20/287). IMF. https://www.imf.org/en/Publications/WP/Issues/2020/12/18/Leverage-Shocks-Firm-Level-Evidence-on-Debt-Overhang-and-Investment-49965.
Das, S., & Tulin, V. (2017). Financial Frictions, Underinvestment, and Investment Composition: Evidence from Indian Corporates (Working Paper Series, No. 17/134). IMF. https://www.imf.org/en/Publications/WP/Issues/2017/06/08/Financial-Frictions-Underinvestment-and-Investment-Composition-Evidence-from-Indian-44939.
Dittmar, A., & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83 (3), 599–634. doi:10.1016/j.jfineco.2005.12.006
Gebauer, S., Setzer, R., & Westphal, A. (2018). Corporate debt and investment: a firm-level analysis for stressed euro area countries. Journal of International Money and Finance, 86 , 112-130. doi:10.1016/j.jimonfin.2018.04.009
Grossman, S., & Hart, O. (1982). Corporate financial structure and managerial incentives. In J. J. McCall (Ed.), The Economics of Information and Uncertainty (p. 107-140). University of Chicago Press. https://www.nber.org/books-and-chapters/economics-information-and-uncertainty/corporate-financial-structure-and-managerial-incentives.
Harford, J., Klasa, S., & Maxwell, W. F. (2014). Refinancing risk and cash holdings. The Journal of Finance, 69 (3), 975–1012. doi:10.1111/jofi.12133
Iyer, R., Peydro, J., da Rocha-Lopes, S., & Schoar, A. (2014). Interbank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis. The Review of Financial Studies, 27 (1), 347-372. doi:10.1093/rfs/hht056
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
Kalemli-Ozcan, S., Laeven, L., & Moreno, D. (2019). Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis (Working Paper, No. 2241). European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2241∼cbea165b30.en.pdf.
Khwaja, A. I., & Mian, A. (2008). Tracing the impact of bank liquidity shocks: Evidence from an emerging market. The American Economic Review, 48 (4), 1413-1442.
Kose, M. A., Ohnsorge, F., Ye, L., & Islamaj, E. (2017). Weakness in Investment Growth: Causes, Implications and Policy Responses (Policy Research Working Paper, No. 7990). World Bank. https://documents1.worldbank.org/curated/en/267921488463293454/pdf/WPS7990.pdf.
Lamont, O. (1995). Corporate-Debt Overhang and Macroeconomic Expectations. American Economic Review, 85 (5), 1106-1117.
Lang, L., Ofek, E., & Stulz, R. (1996). Leverage, Investment, and Firm Growth. Journal of Financial Economics, 40 (1), 3–29. doi:10.1016/0304-405X(95)00842-3
Magud, N., & Sosa, S. (2015). Investment in Emerging Markets: We Are Not in Kansas Anymore...Or Are We? (Working Paper, No. 15/77). IMF. https://www.imf.org/external/pubs/ft/wp/2015/wp1577.pdf.
McGuinness, G., Hogana, T., & Powell, R. (2018). European trade credit use and SME survival. Journal of Corporate Finance, 49 , 81-103. doi:10.1016/j.jcorpfin.2017.12.005
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53 (3), 443-453.
Mortal, S., & Reisel, N. (2013). Capital Allocation by Public and Private Firms. Journal of Financial and Quantitative Analysis, 48 (1), 77-103. doi:10.1017/S0022109013000057
Mutluer Kurul, D., & Tiryaki, S. T. (2016). How credit-constrained are firms in Turkey? A survey-based analysis. Applied Economics Letters, 23 (6), 420-423. doi:10.1080/13504851.2015.1078439
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5 (2), 147–175. doi:10.1016/0304-405X(77)90015-0
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52 (1), 3–46. doi:10.1016/S0304-405X(99)00003-3
Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A cross-country analysis. The Journal of Finance, 61 (6), 2725–2751. doi:10.1111/j.1540-6261.2006.01003.x
Ross, S. (1977). The Determination of financial structure: the incentive-signalling approach. The Bell Journal of Economics, 8 (1), 23–40. doi:10.2307/3003485
Shin, H. H., & Stulz, R. (1998). Are internal capital markets efficient? Quarterly Journal of Economics, 113 (2), 531-552. doi:10.1162/003355398555676
Stiglitz, J., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review, 71 (3), 393–410.
World Bank. (2017). Global Economic Prospects: Weak Investment in Uncertain Times. doi:10.1596/978-1-4648-1016-9
Yarba, I. (2021). Hidden reserves as an alternative channel of firm finance. Central Bank Review, 21 (2), 39–48. doi:10.1016/j.cbrev.2021.04.001
Yarba, I. (2023). Does the inverted U-shape between corporate indebtedness and investment hold up for emerging markets? Evidence from Turkiye. Borsa Istanbul Review, 23 (Supplement 2), S75-S83. doi:10.1016/j.bir.2023.11.002
Yarba, I., & Guner, Z. N. (2020a). Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy. Empirical Economics, 59 , 2473–2507. doi:10.1007/s00181-019-01705-5
Yarba, I., & Guner, Z. N. (2020b). Uncertainty, macroprudential policies and corporate leverage: firm-level evidence. Central Bank Review, 20 (2), 33–42. doi:10.1016/j.cbrev.2020.03.005
Yarba, I., & Yassa, A. (2022). Does stock market listing boost or impede corporate investment? Borsa Istanbul Review, 22 (2), 285-294. doi:10.1016/j.bir.2021.04.001
Zubair, S., Kabir, R., & Huang, X. (2020). Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research, 110 , 456–463. doi:10.1016/j.jbusres.2020.01.063