Evidence on Debt Overhang from Distressed Equity Issues

Preprint
Publisher Website
Google Scholar
Abstract
We analyze the significance of the debt overhang problem for a large sample of UK firms. We find little evidence that debt overhang affects the firm's ability to raise equity and the likelihood of firm failure. We also examine a large sample of financially distressed firms that succeeded in raising equity. Lending banks frequently provided significant concessions, including debt forgiveness, which mitigated the wealth transfers to creditors arising from the equity issue. Taken together the evidence suggests that the debt overhang does not lead to significant under investment even for firms that are highly leveraged and distressed.