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This technical paper features research-based analysis on policy relevant topics conducted within the Research Task Force (RTF) on the interaction between monetary policy, macroprudential policy and financial stability. https://www.ecb.europa.eu/pub/economicresearch/research-networks/html/researcher_research_task_force_rtf.en.html. Technical papers are written in a style that is more broadly accessible compared to standard Working Papers. Their distribution of technical papers is subject to the approval of the Director General of the Directorate General Research.

Using a pan-European data set of 8.5 million firms, we find that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is already excessive, if it is dominated by short maturities, and during systemic banking crises. Our results are consistent with theories of the disciplining role of debt, as well as with models highlighting the negative link between agency problems at firms and banks and investment efficiency.

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