Snow and Leverage

Xavier Giroud · Holger M. Mueller · Alex Stomper · Arne Westerkamp

97 citations0/0 files storedReview of Financial Studies

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

Abstract

Based on a sample of highly leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring. Unexpected Snow provides lending banks with the counterfactual of what would have been the ski hotel's operating performance in the absence of strategic default, allowing them to distinguish between ski hotels that are in distress due to negative demand shocks (“liquidity defaulters”) and those that are in distress due to debt overhang (“strategic defaulters”).

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References

1978Specification Tests in Econometrics 1977Determinants of corporate borrowing 1992Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data 1996Leverage, investment, and firm growth 2006The Theory of Corporate Finance 1997How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed 1988Financing vs. forgiving a debt overhang 1990Troubled debt restructurings

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