With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near-universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy's tail risks either.

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... et in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along. as well as financial accounts and BIS data that capture the growing importance of nonbank lending channels. 3 Using this data set and modern local projection methods, we investigate how past corporate credit growth booms, in contrast to household debt booms, shape cyclical outcomes. The empirical literature on corporate debt overhang is mixed. Recent studies with European firm-level micro data such as Kalemli-Özcan, Laeven, and Moreno (2020) and Popov, Barbiero, and Wolski (2018) find conflicting evidence with respect to the investment level and efficiency effects of high debt. Inevitably, post-2008 data are tinted by the financial crisis (Giroud and Mueller, 2017; Kuchler, 2020; Botta, 2020). During this period, investment may have fallen, not due to overhang, but because impaired banks and other intermediaries constricted the supply of credit to preserve capital (Chodorow-Reich, 2014). Lang, Ofek, and Stulz (1996) make a direct empirical link to debt overhang, arguing that lenders cautiously reduce credit supply if they perceive investment opportunities of levered firms to be bleak. This can curb firm growth together with, but in principle independent of, shareholders' incentive to underinvest. Our empirical analysis paints a consistent picture instead: in aggregate, there is no evidence that corporate debt booms result in deeper declines in investment or output, nor that the economy takes longer to recover than at other times. The growth of corporate credit during the expansion, the level, and their interaction provide no information about how the recession and the recovery will turn out to be. Our findings echo a venerable theoretical literature. In some models, high levels of debt may also have positive effects on recession trajectories. For example, under limited liability, indebted firms might also have an incentive to gamble on otherwise unrealized risky projects (Admati, Demarzo, Hellwig, and Pfleiderer, 2018). Moreover, when equity holders have superior information about the economic value of assets, high-value firms are less likely to issue new equity as the market tends to underprice it. However, under-investment can then be prevented by debt issuance (Myers and Majluf, 1984) . That is, high debt levels indicate prudent past investment whose after-effects might counteract the adverse effects of debt overhang at the macro level. If corporate credit booms have little effect on the recovery, do they make the economy more fragile, subject to infrequent but large loses? Like Adrian, Boyarchenko, and Giannone (2019); Adrian, Grinberg, Liang, and Malik (2018), we investigate how corporate debt