Debt overhang

From Wikipedia, the free encyclopedia

Debt overhang is a fiscal situation of a government, predominantly in developing countries. It describes a situation where the debt of a country exceeds its future capacity to pay it.^[1] Debt overhang in developing countries was the motivation for the successful Jubilee 2000 campaign.

Debt overhang also applies to financially distressed firms, where the existence of debt removes the incentive to invest in positive NPV projects. This is because if debt repayments are large enough, any benefits from good investments will go straight to the creditors, who have seniority over equity holders.

[edit] See also

• Capital structure
• Corporate finance

[edit] References

1. ^ Debt Overhang.. Investopedia ULC (August 2007). Retrieved on 2007-08-10.