Is there too much business debt?
In the US, nonfinancial corporate debt is at a fifty year high ratio to GDP. Is this high business debt a threat to financial stability? Kovner and Zborowski look at different leverage measures and find that:
- Corporate profits have also been increasing as a share of GNP. As a result the debt to profits ratio has been falling and is now well below the fifty-year highs.
- But the ratio of debt to EBITDA has significantly increased reflecting high debt growth at the riskiest public corporations.
- Other leverage measures such as nonfinancial corporate debt to book assets and market capitalization as well as the interest coverage ratio yield inconclusive results.
Is There Too Much Business Debt?
By: Anna Kovner, Brandon Zborowski – Federal Reserve Bank of New York
Corporate bond defaults
In the past thirty years, defaults on corporate bonds have been substantially higher than the historical average. Becker and Ivashina find that this increase in credit risk is attributed to the “disruptor” firms, i.e. the new and fast-growing firms which displace incumbents. As established firms, who are the main issuers of bonds, get displaced by the disruptors and lose market share, corporate default rates rise.
Disruption and credit markets
Authors: Bo Becker, Victoria Ivashina
From: Stockholm School of Economics, Harvard University