Debt Overhang and the Retail Apocalypse

Abstract

Debt overhang is central for theories of capital structure, yet credible em- pirical estimates of its effects remain elusive. We study the consequences and mechanisms of debt overhang using exogenous changes in the leverage of com- mercial retail properties. Identification comes from changes in property values occurring after pre-determined debt rollover dates. We show that debt reduces profitability by impairing property owners? response to negative shocks, re- ducing the business activity of their remaining retail tenants. For the median property, a 10 percentage point leverage increase causes 22% lower employment, mostly in large retail stores, and overall 15% lower operating income.

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