Government Debt and the Returns to Innovation

81 Pages Posted: 24 May 2016 Last revised: 25 Jul 2018

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of North Carolina Kenan-Flagler Business School

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Steve Raymond

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Lukas Schmid

Duke University - The Fuqua School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2018

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 premia 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.

Keywords: Government Debt, Fiscal Uncertainty, Cross Section of Stock Returns, Predictability, R&D, Growth

JEL Classification: E22, E62, H30, O33, O41

Suggested Citation

Croce, Mariano Massimiliano and Nguyen, Thien Tung and Raymond, Steve and Schmid, Lukas, Government Debt and the Returns to Innovation (July 17, 2018). Journal of Financial Economics (JFE), Forthcoming; Fisher College of Business Working Paper No. 2016-03-10; Charles A. Dice Center Working Paper No. 2016-10. Available at SSRN: https://ssrn.com/abstract=2781506 or http://dx.doi.org/10.2139/ssrn.2781506

Mariano Massimiliano Croce

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://https://sites.google.com/view/mmcroce/home

Thien Tung Nguyen (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Steve Raymond

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

Lukas Schmid

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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