## Scarring and Corporate Debt

_IMF Working Papers, October 28, 2022_

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**Canonical URL:** [Scarring and Corporate Debt](https://www.imf.org/en/publications/wp/issues/2022/10/28/scarring-and-corporate-debt-525210)

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## Bibliographic details
- 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

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### Summary
- 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.

### Empirical findings and mechanisms
- 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.

### Methodology indicators (as reported)
- 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.

### Policy-relevant implications (inferred from findings reported)
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2022/10/28/scarring-and-corporate-debt-525210_