lower investment, particularly in highly indebted economies forced to dedicate a large share of their resources to servicing debt. Second, we exclude from our sample all the countries that experienced sizeable rescheduling in our sample.

# 6.1 Interest Rate Shocks

If t = 1 tends to correspond on average with a period of increasing interest rates worldwide, it is possible that the fall in investment that we capture should be a mere manifestation that increasing debt service makes it particularly hard for highly-indebted economies to invest. In addition, rising interest rates could also account for falling output (and perhaps exports), and so explain a sudden jump in debt ratios. And since we use interest rate spreads, we do not capture a world increase in rates. Here we offer two rebuffals to this alternative scenario. First, we provide evidence that debt service actually does not rise during our average event (which is consistent with falling interest rates). Second, we provide sample splits showing that for similar levels of indebtedness, different countries display different investment responses .Heterogeneous responses -for a given debt level- rule out the possibility that our evidence stems from indiscriminate crowding out of investment, mechanically caused by high debt service.

Figure 13 plots the time path of debt service. There is no evidence that the debt burden increases for positive values of t. In two cases, debt service increases in the first years of the event, but if anything it turns downward in the overhang zone, undoubtedly thanks to the concessional borrowing conditions we document in the previous section. This is inconsistent with the view that would ascribe the observed fall in investment to mechanical crowding out On Figure 14, we plot the response of investment for two sub-samples of events, according to the enforcement of property rights as measured by Acemoglu, Johnson and Robinson (2001).<sup>37</sup> Arguably, property rights are relevant theoretically, since they may capture the ability creditors have to monitor and sanction debtors’ behavior, and thus they may reflect the gravity of an overhang problem. And indeed, the fall in investment is clearly subdued in countries with good enforcement, between two and three times smaller than in the rest of the overhang sample. While investment tends to fall as well even with good property rights, the relevance of the actual overhang date is much less clear. The response of investment is much more severe with poor property rights, which is consistent with theory, and rules out the possibility that our event study merely captures the chronology of a world recession.

Finally, Figure 15 reports the time path of investment in two samples, characterized by the World Bank classification of low income countries.<sup>38</sup> Consistent with the non-parametric results, debt overhang appears to set mostly in low income countries, where investment falls by the largest proportion in most cases.<sup>39</sup> An explanation of our results based on a global recession would have difficulties accounting for these differential responses.

> 37 Low enforcement countries are ones with grades of 1 or 2, whereas high ones take values 3, 4 or 5.

> 38 We have between 21 and 23 low income countries in our sample of events, depending on the criterion used to identify the event.

> 39 In results available upon request, we also investigate the response of interest rates in both samples. The split continues to be relevant, with most fall in interest rates occurring in the low income countries.

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