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Using a unique data set on forbearance agreements, I study the relationship between credit forbearance and firm investment policy and find evidence that firms invest more efficiently after lenders forbear a credit default. Following forbearance, firms experience an economically significant reduction in investment distortion–deviations from expected investment levels–ranging from 17.4% to 26.8%. Efficiency improvements are concentrated among firms exhibiting overinvestment distortions prior to forbearance, and firms with underinvestment and overinvestment distortions increase and decrease investment after forbearance, respectively. The results are robust to multiple measures of investment distortion, multiple estimation procedures, and to a subset of firms that entered forbearance agreements during an exogenous macroeconomic shock.
Patrick Gosselin (Tue,) studied this question.