CORPORATE-DEBT OVERHANG AND MACROECONOMIC EXPECTATIONS

One way in which corporate financial structure affects macroeconomic p erformance is by creating debt overhang. Debt overhang occurs when exi sting debt deters new investment because the benefits from new investm ent will go to the existing creditors, not to the new investors. If th e economy is booming, debt overhang will not bind because the returns to investing are high. If the economy is stagnant, debt overhang will bind because the returns to investing are low. As a result, high level s of debt can create multiple expectational equilibria in which ''anim al spirits'' determine economy activity.