Government debt and the returns to innovation


Scholarly Edition

© 2018 Elsevier B.V. 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.

Full Text

Duke Authors

Cited Authors

  • Croce, MM; Nguyen, TT; Raymond, S; Schmid, L

Published Date

  • June 1, 2019

Start / End Page

  • 205 - 225

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2018.11.010

Citation Source

  • Scopus