Public Debt and the Returns to Innovation


Speaker


Abstract

Elevated levels of government debt raise concerns about their effects on long-term growth prospects. This study shows that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms; and (ii) higher levels of the debt-to-GDP ratio predict higher risk premia for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms are associated with declines in subsequent R&D activity and economic growth. We study these findings in a production-based asset pricing model with endogenous innovation. By accounting for fiscal and political risk, our model reproduces several aspects of the empirical evidence.

The paper can be found here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2781506. Please note that the empirical analyses have been completely revised and are not yet included in this version of the paper.