The costs of corporate debt overhang☆

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang - liabilities to cash flow - aligns with traditional theory and focuses on the importance of a firm's debt servicing capacity. further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact overhang on firm investment and growth.