Giroud, Xavier and Mueller, Holger M. and Stomper, Alex and Westerkamp, Arne
Snow and leverage.
Review of Financial Studies, 25 (3).
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 ski hotel'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"). (author's abstract)