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Government Debt and the Returns to Innovation

Author

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  • Massimiliano Croce, Mariano

    (University of North Carolina)

  • Nguyen, Thien Tung

    (Ohio State University)

  • McGregor Raymond, Steve

    (University of North Carolina)

  • Schmid, Lukas

    (Duke University)

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.

Suggested Citation

  • Massimiliano Croce, Mariano & Nguyen, Thien Tung & McGregor Raymond, Steve & Schmid, Lukas, 2016. "Government Debt and the Returns to Innovation," Working Paper Series 2016-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2016-10
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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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