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Debt, Innovation, and Growth

Author

Listed:
  • Thomas Geelen

    (Copenhagen Business School - Department of Finance; Danish Finance Institute)

  • Jakub Hajda

    (University of Lausanne; Swiss Finance Institute)

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

Abstract

Recent empirical studies show that innovative firms heavily rely on debt financing. This paper investigates the relation between debt financing, innovation, and growth in a Schumpeterian growth model in which firms' dynamic R&D and financing choices are jointly and endogenously determined. The paper demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level. The paper also shows that debt financing has large effects on firm entry, firm turnover, and industry structure and evolution. Lastly, it predicts substantial intra-industry variation in leverage and innovation, in line with the empirical evidence..

Suggested Citation

  • Thomas Geelen & Jakub Hajda & Erwan Morellec, 2019. "Debt, Innovation, and Growth," Swiss Finance Institute Research Paper Series 19-79, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1979
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3416576
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    Citations

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    Cited by:

    1. Balter, Anne G. & Huisman, Kuno J.M. & Kort, Peter M., 2022. "Effects of creative destruction on the size and timing of an investment," International Journal of Production Economics, Elsevier, vol. 252(C).
    2. José Manuel Santos‐Jaén & Antonia Madrid‐Guijarro & Domingo García‐Pérez‐de‐Lema, 2021. "The impact of corporate social responsibility on innovation in small and medium‐sized enterprises: The mediating role of debt terms and human capital," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(4), pages 1200-1215, July.

    More about this item

    Keywords

    debt; innovation; industry dynamics; growth;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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