This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high-debt firms seeing a larger decline in investment. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28% of the average medium-term decline of investment. This effect is especially larger for: (i) countries with less efficient bankruptcy systems; (ii) during global recessions and firms operating in sectors with higher export dependences; and (iii) firms that are credit-constrained—small and less profitable firms, and those with high share of short-term debt.

This paper links banking system development to the colonial and legal history of African countries. Based on a sample of 40 African countries from 2000 to 2018, our empirical findings show a significant dependence of current financial institutions on the inherited legal origin and the colonization type. Findings also reveal that current financial legal institutions are not major determinants of banking system development, and that institutional development and governance quality are more important. A high share of government spending relative to GDP also positively affects banking system development in African countries.