Journal of Financial Economics Vol. 132 No. 3 2019
Government debt and the returns to innovation
Abstract
Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross-section of US stock returns, we show 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 premiums for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent productivity and economic growth. We propose a production-based asset pricing model with endogenous innovation and fiscal policy shocks that can rationalize key aspects of the empirical evidence. Our study highlights a novel and distinct risk channel shaping the link between government debt and future growth.
- DOI
- 10.1016/j.jfineco.2018.11.010
- Volume
- 132
- Issue
- 3
- Pages
- 205-225
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib