Drilling and Debt |
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| Authors: | ERIK P. GILJE ELENA LOUTSKINA DANIEL MURPHY |
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| Affiliation: | 1. Correspondence: Erik P. Gilje, The Wharton School, University of Pennsylvania, 3620 Locust Walk - SHDH 2456, Philadelphia, PA, 19104;2. e-mail: gilje@wharton.upenn.edu.;3. Erik P. Gilje is with the Wharton School, University of Pennsylvania and NBER. Elena Loutskina and Daniel Murphy are with the University of Virginia Darden School of Business. We would like to thank Steve Baker;4. David De Angelis;5. Michael Faulkender;6. Vincent Glode;7. Rustom Irani;8. Don Keim;9. Doron Levit;10. Song Ma;11. Greg Nini;12. Krishna Ramaswamy;13. Julio Riutort;14. Michael Roberts;15. Mike Schwert;16. Phil Strahan;17. Mathieu Taschereau-Dumouchel;18. Luke Taylor;19. Hongda Zhong;20. and seminar participants at Wharton, Dartmouth (Tuck), University of Virginia (Darden), IU Bloomington, GWU, the 2016 MIT Junior Faculty Conference, 9th Annual FSU SunTrust Beach Conference, 2017 PNC University of Kentucky Finance Conference, 14th Annual Conference in Financial Economic Research IDC, 2017 Frontiers of Finance Conference, 2017 Financial Intermediation Research Society Conference, and Finance—UC 12th International Conference for helpful comments. We would also like to thank Julia Tulloh for her valuable research assistance, and the Rodney L. White center for financial support. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. |
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| Abstract: | This paper documents a previously unrecognized debt-related investment distortion. Using detailed project-level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long-run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long-run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations. |
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