Can Corporate Debt Foster Innovation and Growth?

71 Pages Posted: 13 Jul 2019 Last revised: 18 May 2021

See all articles by Thomas Geelen

Thomas Geelen

Copenhagen Business School - Department of Finance; Danish Finance Institute

Jakub Hajda

University of Lausanne

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: May 18, 2021

Abstract

Recent empirical studies show that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that focuses solely on incumbents when measuring the effects of debt on investment.

Keywords: debt, innovation, industry dynamics, growth

JEL Classification: G32, O30

Suggested Citation

Geelen, Thomas and Hajda, Jakub and Morellec, Erwan, Can Corporate Debt Foster Innovation and Growth? (May 18, 2021). 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

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/

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Switzerland

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