The Importance of Strong Balance Sheets
- By Sam van de Schootbrugge
- 4 min read
A review of the financial crisis literature finds crises characterised by excessive household debt have significantly worse medium-term growth implications than those involving corporate debt. This is because, unlike household debt, corporate debt can normally be restructured and liquidated quickly. However, just like households, large run-ups in debt can significantly hinder a firm when looking to fund future investments.
And so, a new Bank of England working paper asks whether corporate debt booms can also, on average, affect medium-term growth prospects. The author uses a large panel of listed US nonfinancial firms from the mid-1980s to 2019 and categorises debt vulnerability by (a) the debt accumulation speed, (b) firm leverage, and (c) and asset liquidity.
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