Government Debt and the Returns to Innovation

81 Pages Posted: 22 Jan 2018

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

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

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 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: Cross Section of Stock Returns, Fiscal Uncertainty, Government Debt, growth, predictability, R&D

Suggested Citation

Croce, Mariano Massimiliano and Nguyen, Thien Tung and Raymond, Steve and Schmid, Lukas, Government Debt and the Returns to Innovation (January 2018). CEPR Discussion Paper No. DP12617, Available at SSRN: https://ssrn.com/abstract=3106821

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thien Tung Nguyen

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

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
444
PlumX Metrics