Scars and corporate debt

Scars and corporate debt


Julia Estefania-Flores; Davide Furceri; Pablo González-Dominguez; Siddharth Kothari; Nour Tawck

Publication date:

October 28, 2022

Disclaimer: IMF Working Papers describe ongoing research by the author(s) and are published to elicit comment and encourage debate. The opinions expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Board of Directors, or IMF management.


This article assesses the scarring effect of recessions on business investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of corporate debt on the investment response to recessions is statistically significant and economically important, with highly leveraged firms experiencing a larger decline in investment than low-leveraged firms. Rough calculations suggest that corporate debt accounts for at least 28% of the medium-term average drop in investment after a recession. This effect is particularly important for companies that are credit-constrained (smaller companies that are less profitable, as well as companies with a high share of short-term debt) and which may therefore have more difficulty in renewing or raising new funds. to invest in new projects. . The results are robust to several controls, including various subsamples, alternative measures of recessions and explanatory variables, and a large set of controls.