Review of Financial Studies Vol. 35 No. 9 2022

Can Corporate Debt Foster Innovation and Growth?

Thomas Geelen¹; Jakub Hajda²; Erwan Morellec³

¹ Copenhagen Business School and Danish Finance Institute , Denmark · ² HEC Montréal , Canada · ³ EPF Lausanne, Swiss Finance Institute, and CEPR , Switzerland

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.

DOI

10.1093/rfs/hhab129

Volume

35

Issue

9

Pages

4152-4200

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓