{
  "title": "Scarring and Corporate Debt",
  "publication": "IMF Working Papers, October 28, 2022",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2022/10/28/scarring-and-corporate-debt-525210",
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  "summary": "This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt.\n- High debt firms see a larger decline in investment than low debt firms.\n- 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.\n- 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—who may find it more difficult to rollover or raise new funds to invest in new projects.\n- Results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls."
    },
    {
      "heading": "Empirical findings and mechanisms",
      "content": "- The effect of firms’ debt in shaping the response of investment to recessions is described as both statistically significant and economically sizeable.\n- High debt firms exhibit a larger decline in investment relative to low debt firms during and after recessions.\n- Credit constraints amplify scarring: small firms, less profitable firms, and firms with a high share of short-term debt face larger investment declines due to greater rollover and financing difficulties."
    },
    {
      "heading": "Methodology indicators (as reported)",
      "content": "- Keywords and methods referenced include: Capital spending, Corporate Debt, debt dummy, debt firm, Economic recession, Firms, Global, investment to recession, Local Projection, Recessions, Scarring, scarring effect.\n- Robustness checks reported include alternative sub-samples, alternative measures of recessions, alternative explanatory variables, and extensive control sets."
    },
    {
      "heading": "Policy-relevant implications (inferred from findings reported)",
      "content": "- Corporate debt levels materially influence post-recession investment scarring, implying policies that affect corporate leverage and access to finance can alter medium-term investment recovery.\n- Credit access for small, less profitable, and short-term debt–heavy firms is a key channel: measures to ease rollover and new financing for these firms could mitigate scarring.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2022/10/28/scarring-and-corporate-debt-525210"
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    "Authors: Julia Estefania-Flores, Davide Furceri, Pablo Gonzalez-Dominguez, Siddharth Kothari, Nour Tawk",
    "Published: October 28, 2022",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400225703.001",
    "Paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt.",
    "High debt firms see 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.",
    "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—who may find it more difficult to rollover or raise new funds to invest in new projects.",
    "Results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls.",
    "The effect of firms’ debt in shaping the response of investment to recessions is described as both statistically significant and economically sizeable.",
    "High debt firms exhibit a larger decline in investment relative to low debt firms during and after recessions.",
    "Credit constraints amplify scarring: small firms, less profitable firms, and firms with a high share of short-term debt face larger investment declines due to greater rollover and financing difficulties.",
    "Keywords and methods referenced include: Capital spending, Corporate Debt, debt dummy, debt firm, Economic recession, Firms, Global, investment to recession, Local Projection, Recessions, Scarring, scarring effect.",
    "Robustness checks reported include alternative sub-samples, alternative measures of recessions, alternative explanatory variables, and extensive control sets.",
    "Corporate debt levels materially influence post-recession investment scarring, implying policies that affect corporate leverage and access to finance can alter medium-term investment recovery.",
    "Credit access for small, less profitable, and short-term debt–heavy firms is a key channel: measures to ease rollover and new financing for these firms could mitigate scarring.",
    "**Working Paper**"
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