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Can Corporate Debt Foster Innovation and Growth?

Author

Listed:
  • Thomas Geelen
  • Jakub Hajda
  • Erwan Morellec

Abstract

Recent empirical studies have shown that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that solely focuses on incumbents when measuring the effects of debt on investment.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Thomas Geelen & Jakub Hajda & Erwan Morellec, 2022. "Can Corporate Debt Foster Innovation and Growth?," The Review of Financial Studies, Society for Financial Studies, vol. 35(9), pages 4152-4200.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:9:p:4152-4200.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab129
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    Cited by:

    1. Hajda, Jakub & Nikolov, Boris, 2022. "Product market strategy and corporate policies," Journal of Financial Economics, Elsevier, vol. 146(3), pages 932-964.

    More about this item

    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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