Snow and Leverage

Abstract

Using a sample of highly (over-)leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance (return on assets, net profit margin). In particular, a reduction in leverage leads to a decrease in overhead costs, wages, and input costs, and to an increase in sales. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring. Effectively, Unexpected Snow provides lending banks with the counterfactual of what would have been the skihotel's operating performance in the absence of strategic default, thus allowing to distinguish between ski hotels that are in distress due to negative demand shocks ("liquidity defaulters") and ski hotels that are in distress due to debt overhang ("strategic defaulters").

Weathering Cash Flow Shocks

“…Finally, we contribute to a growing literature on the effects of natural events on firm decision‐making and economic activity (e.g., Giroud et al. (2012), Bloesch and Gourio (2015), Chen et al. (2016), Dessaint and Matray (2017)).…”

Endogeneity in Empirical Corporate Finance

“…Other examples of instrumental variables applications in corporate finance include: Guiso, Sapienza, and Zingales (2004),Becker (2007),Giroud et al (2010),and Chaney, Sraer, and Thesmar (in press).…”

Untitled

“…Denis and McKeon (2012) use the total debt over total debt plus the market value of equity. Giroud et al (2012) define the market measure of financial leverage as the ratio of the book value of total debt to the book value of assets. George and Hwang (2010) calculate the ratio of the book value of long-term debt to the book value of assets, while Brav (2009) uses the ratio of short-term debt plus long-term debt to total assets.…”