Debt Overhang

An underinvestment problem in which existing debt reduces the incentive to finance a positive-value project because part of the project's gains would accrue to existing creditors rather than equity holders.

Why It Matters

Debt overhang helps explain financing constraints, covenant design, debt exchanges, priority disputes, and restructuring choices when a firm's legacy claims change the payoff from new investment.

Reading the Measure

A working relation and an interpretive limit for corporate-finance use.

Interpretive caution

Not every failure to invest is debt overhang. The analysis should identify who receives the marginal gains, which financing alternatives are available, and whether information, agency, or liquidity constraints offer a better explanation.

Accounting reference: Myers: Determinants of Corporate Borrowing