Debt, Innovation, and Growth

69 Pages Posted: 13 Jul 2019 Last revised: 4 Aug 2020

See all articles by Thomas Geelen

Thomas Geelen

Copenhagen Business School - Department of Finance; Danish Finance Institute

Jakub Hajda

University of Lausanne; Swiss Finance Institute

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: July 30, 2020

Abstract

Recent empirical studies show that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers investment by incumbents. We show that a second effect of debt is that it stimulates entry of new firms and, therefore, innovation. Using a Schumpeterian growth model in which firms' dynamic R&D and financing choices are endogenously determined, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our paper shows that debt financing has large effects on firm turnover and industry structure. It also predicts substantial intra-industry variation in leverage and innovation.

Keywords: debt, innovation, industry dynamics, growth

JEL Classification: G32, O30

Suggested Citation

Geelen, Thomas and Hajda, Jakub and Morellec, Erwan, Debt, Innovation, and Growth (July 30, 2020). Swiss Finance Institute Research Paper No. 19-79, Available at SSRN: https://ssrn.com/abstract=3416576 or http://dx.doi.org/10.2139/ssrn.3416576

Thomas Geelen (Contact Author)

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Danish Finance Institute ( email )

Jakub Hajda

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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