Government Spending, Aggregate Demand Sensitivity, and Corporate Innovation

44 Pages Posted: 8 Dec 2017 Last revised: 5 May 2020

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: May 5, 2020

Abstract

We show that the extent to which government spending hinders innovation is highly dependent on a firm’s revenue sensitivity to consumer demand. Demand sensitivity effects are stronger for firms that are more dependent on internal financing to fund innovative activity such as firms with high intangible assets and low cashflows. Managers respond to declines in earnings by reducing investments and increasing cash holdings. Payouts and external financing remain unaffected, suggesting that managers view changes in government spending as transitory shocks. Finally, the demand sensitivity channel operates independently of the resource diversification and crowding out mechanisms documented in prior studies.

Keywords: Government spending, innovation, patents, R&D expenditure, new product announcements, crowding-out effect

JEL Classification: G31, G38, H32

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, Government Spending, Aggregate Demand Sensitivity, and Corporate Innovation (May 5, 2020). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, Available at SSRN: https://ssrn.com/abstract=3082217 or http://dx.doi.org/10.2139/ssrn.3082217

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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