Corporate Financing of Innovation and the Medium-Run Cycle
46 Pages Posted: 28 Nov 2013 Last revised: 13 Oct 2015
Date Written: November 20, 2013
I document that publicly-listed firms which are intensive in innovation (intangible capital formation) are less able to engage in volatile external financing flows. The effect is primarily due to debt financing; equity financing acts as a partial substitute. Then, I develop a business cycle model with endogenous innovation that incorporates these facts in order to explain the short and medium-run effects of financial shocks. The increases in the cost of debt and venture capital financing during the Great Recession can explain an important part of the ensuing deviation of output from trend, as the reduction in innovation amplifies persistence.
Keywords: endogenous innovation, financial crises, Great Recession, Great Deviation, medium-run cycle, external financing
JEL Classification: E32, G00, O30
Suggested Citation: Suggested Citation