Debt Overhang and the Retail Apocalypse

We study how debt overhang affects firms' capacity to respond to shocks using exogenous changes in the leverage of commercial retail properties. We employ a difference-in-differences strategy based on variation in mortgage origination dates to show that leverage impairs property owners' response to store closures, affecting the business activity of their retail tenants. For the median property, a 10 percentage point leverage increase causes 22% lower employment mostly in large retail stores, and overall 15% lower operating income. Leverage also increases the time to fill vacant storefronts, leads to a different composition of tenants, and reduces employment in chain stores. These effects are stronger for owners who are close to renewing their mortgages.