Caught in a Debt Trap: Financial Distress and Corporate Production Decisions

Abstract

The research investigates the causal effects of financial distress on corporate production within the oil industry framework. The identification strategy capitalises on the exogenous shock from the 2014 oil price collapse and pre-existing firm-level variations in debt maturity structures. Employing a difference-in-difference methodology, the study reveals that firms facing greater rollover risk in 2014 significantly expanded production in the post-crisis period. This effect is particularly pronounced among firms with lower cash reserves, higher capital intensity, and increased levels of secured debt. The findings offer policy insights into the dramatic declines in commodity prices witnessed during the oil crisis and its subsequent impact.