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© 2022 International Monetary Fund
WP/22/211
IMF Working Paper
Asia and Pacific Department
Scarring and Corporate Debt
Prepared by Julia Estefania-Flores, Davide Furceri, Pablo Gonzalez-Dominguez, Siddharth Kothari and Nour Tawkâ€
Authorized for distribution by Jay Peiris
October 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract:
This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high debt firms seeing a larger decline in investment than low debt firms. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28 percent of the average medium-term decline of investment following a recession. This effect is especially larger for firms that are credit constrained—small and less profitable firms, as well as firms with high share of short-term debt—and that therefore may find it more difficult to rollover or raise new funds to invest in new projects. The results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls.
| JEL Classification Numbers: | E22; E32; G39. |
| Keywords: | Scarring; Corporate Debt; Recessions; Firms; Local Projection. |
| Author’s E-Mail Address: | JEstefaniaflores@imf.org; DFurceri@imf.org; PGonzalez@imf.org; SKothari@imf.org; NTawk@imf.org. |
| JEL Classification Numbers: | E22; E32; G39. |
| Keywords: | Scarring; Corporate Debt; Recessions; Firms; Local Projection. |
| Author’s E-Mail Address: | JEstefaniaflores@imf.org; DFurceri@imf.org; PGonzalez@imf.org; SKothari@imf.org; NTawk@imf.org. |
Title Page
WORKING PAPERS
Scarring and Corporate Debt
Prepared by Julia Estefania-Flores, Davide Furceri, Pablo Gonzalez-Dominguez, Siddharth Kothari and Nour Tawk.
Table of Contents
I. Introduction
II. Data
A. Firm-level data
B. Recessions and other macroeconomic data
C. Stylized facts on scarring and corporate debt
III. Empirical Methodology
IV. Results
V. Robustness Checks
A. Sample
B. Alternative dependent variables, recessions, and debt dummies
C. Additional control variables
VI. Non-Linearity
VII. Conclusions
References
Tables and Figures
Annex 1: Data
Annex 2: Additional Results
Julia Estefania-Flores is a Research Analyst in the IMF Asia Pacific Department; Davide Furceri is a Deputy Division Chief in the Asia Pacific Department of the IMF; Pablo Gonzalez-Dominguez is a Research Analyst in the IMF Asia Pacific Department; Siddharth Kothari is an Economist in the IMF Asia Pacific Department; Nour Tawk is an Economist in the IMF Asia Pacific Department. We thank participants in various conferences and universities for their valuable comments and suggestions.