Debt Overhang (Paperback)

Please note that the content of this book primarily consists of articles available from Wikipedia or other free sources online. Debt overhang is when an organization has existing debt so great that it cannot easily borrow more money, even when that new borrowing is actually a good investment that would more than pay for itself. This problem emerges, for example, if a company has a new investment project with positive net present value, but cannot capture the investment opportunity due to an existing debt position, i.e., the face value of the existing debt is bigger than the expected payoff to debt holders. Thus, debt holders will not finance the firm. The situation emerges if existing debtholders of a company can be expected to lay claim to the profits of the new project, and this renders the NPV of the project negative.