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The Innovator's Risk Premium: Sticky Hurdle Rates, the Cost of Capital, and Creative Destruction

Author

Listed:
  • Craig A. Chikis

    (University of Chicago)

  • Jonathan Goldberg

    (Board of Governors of the Federal Reserve System)

  • David López-Salido

    (Banco de España)

Abstract

Firms' hurdle rates exceed their financial cost of capital. This gap varies across firms and has widened in the aggregate. In our Schumpeterian model, two frictions drive this gap: firm decision-makers require an innovator's risk premium for undiversifiable innovation risk, and innovation profits are imperfectly pledgeable. Higher undiversifiable risk lowers the financial cost of capital while hurdle rates remain sticky or even rise. Widening gaps weaken creative destruction; profits and superstar valuations rise despite firms forgoing positive-NPV projects. The calibrated model matches cross-sectional patterns in gaps, R&D, market power and firm dynamics, and explains weak productivity growth and declining dynamism.

Suggested Citation

  • Craig A. Chikis & Jonathan Goldberg & David López-Salido, 2026. "The Innovator's Risk Premium: Sticky Hurdle Rates, the Cost of Capital, and Creative Destruction," Working Papers 2628, Banco de España.
    • Handle: RePEc:bde:wpaper:2628e
    DOI: https://doi.org/10.53479/44406
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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