Nicolas Crouzet - Northwestern University - Kellogg School of Management
Can the cure kill the patient?
Corporate credit interventions and debt overhang∗
Nicolas Crouzet† Fabrice Tourre‡ May 2021
Interventions in corporate credit markets were a major innovation in the policy re- sponse to the 2020 recession. This paper develops and estimates a model to quantify their impact on borrowing and investment. Even during downturns, credit interventions can be a bad policy idea, because they exacerbate debt overhang and depress invest- ment in the long run. However, if the downturn is accompanied by financial market disruptions, they initially help forestall inefficient liquidations. These short term benefits quantitatively dominate the long run overhang costs. Additionally, constraining share- holder distributions, and targeting high-leverage firms substantially increases the "bang for the buck" of credit interventions.