Debt, Innovation, and Growth

58 Pages Posted: 13 Jul 2019 Last revised: 15 Oct 2019

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: October 15, 2019

Abstract

Recent empirical studies show that innovative firms heavily rely on debt financing. This paper investigates the relation between debt financing, innovation, and growth in a Schumpeterian growth model in which firms' dynamic R&D, investment, and financing choices are jointly and endogenously determined. The paper demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level. The paper also shows that debt financing has large effects on firm entry, firm turnover, and industry structure and evolution. Lastly, it predicts substantial intra-industry variation in leverage and innovation, in line with the empirical evidence.

Keywords: debt, innovation, industry dynamics, growth

JEL Classification: G32, O30

Suggested Citation

Geelen, Thomas and Hajda, Jakub and Morellec, Erwan, Debt, Innovation, and Growth (October 15, 2019). 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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