Aswath Damodaran argues AI investment debt could spread a market correction

Aswath Damodaran argues AI investment debt could spread a market correction

Aswath Damodaran’s post was published on February 20, 2026. He argues that debt is not simply cheaper than equity: tax benefits can add to a firm’s value, but borrowing also raises bankruptcy risk and can constrain business operations. Companies may borrow more or less than this tradeoff suggests because of factors such as control, subsidies, covenants and regulation. Damodaran applies this argument to AI investment. He says large technology companies have increasingly turned to debt to fund infrastructure, while smaller firms have also sought outside financing, including private credit. He questions whether private credit’s claimed advantages, such as faster decisions and better risk assessment, justify lending for AI projects. He warns that speed and customization can come at the expense of due diligence. His central concern is that, if his view of overinvestment in AI is right, debt could widen the consequences of a market correction beyond company shareholders to private credit lenders and the broader economy. He says a shakeout in private credit is overdue, while allowing that it could separate careful lenders from sloppy ones and shrink the sector to healthier levels. Whether AI investments generate enough returns to service their debt, and how private credit would fare in a credit shock, remain unknown.

Publication: 9198f647-e92f-938d-04bb-4fb93e535d7c

attribution — pass: The reading correctly attributes the argument to Aswath Damodaran's own blog post. It is one argued piece. The trailing list of data links and other Data Update posts is a page sidebar, not the source itself.

I have argued in earlier posts that it is very likely that they are collectively over investing

summary — uncertain: Two problems. First, "private credit" is the central term and is never explained; its meaning as non-bank lending is essential, and no definitions are supplied. Second, the summary and claim 4 say Damodaran is "allowing that it could separate careful lenders from sloppy ones," which softens his affirmative "will separate" into a concession. Smallest repair: briefly gloss private credit as lending by non-bank funds, and say the shakeout "will separate" lenders and "perhaps" shrink the sector. Optional: note his view that big tech's $160 billion in borrowing does not put those firms at risk.

the rise of private credit as an alternative to banks and the corporate bond market

date — pass: February 20, 2026 matches originalPublished; the instant falls on the same UTC day. The page is a publisher page, so no archive disclosure is needed. The page was modified on October 23, 2026, but every cited passage is plainly part of the original article body. Later sidebar items, such as Data Update 8, are not used. The reading presents no later events and frames the correction as Damodaran's conditional view, not as an outcome.

If you agree with my contention that companies are collectively over investing in AI, driven by the big market delusion

support — pass: The claims are grounded in the text. The source covers the tax benefit versus bankruptcy-cost tradeoff, skepticism about private credit's advantages, due-diligence risk from speed, debt spreading a correction, and an overdue shakeout. The question follows from his argument about who bears losses. The edit after publication does not affect these passages, which are plainly original body text. This grounding does not verify his forecast.

the effects of a correction will no longer be isolated to equity investors in these companies, and as private credit gets repriced

media — pass: No media is selected, and none was supplied as a verified candidate.