Military Spending Shocks and Private Sector Innovation

38 Pages Posted: 8 Dec 2017 Last revised: 23 Jun 2021

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: June 15, 2021

Abstract

Increases in defense spending – the largest portion of discretionary government spending in the United States – are negatively associated with private sector firm innovation. We show that the extent to which defense spending hinders innovation is dependent on a firm’s cash flow sensitivity to consumer demand. The negative effects are stronger for firms with low tangible collateral that rely on internal cash flow to finance projects. The demand mechanism operates independently of resource diversification and public debt crowding-out mechanisms documented in prior studies. Our results are robust to alternative measures of firm innovation and different estimation methodologies.

Keywords: Government spending, military spending, firm innovation, patents, R&D

JEL Classification: G31, G38, H32

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, Military Spending Shocks and Private Sector Innovation (June 15, 2021). 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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