Interest Rates and Debt Overhang: The Effects of Rate Hikes on Private Investment in the European Union

Abstract

Using a pan-European dataset of 30 thousand firms, I study the effects of the recent key interest rate hike from 0% to 4.5% and firm leverage on corporate investment. I find that the negative effects of leverage on investment are exacerbated during the hike period compared to a more stable interest rate environment. I also find that firms with higher levels of leverage are impacted significantly worse by the rising interest rates. My results are consistent with existing literature, and I add to the discussion by closely analyzing the interaction of interest rates and leverage and by investigating an event that has not been studied before.