Product Innovation and Credit Market Disruptions

Abstract

We provide new evidence that disruptions in firm's access to credit during the recent financial crisis had significant effects on product innovation in the consumer-goods sector. We combine highly granular retail-scan data with lending data from the Community Reinvestment Act and Dealscan and we find that credit-constrained firms introduced fewer new products, those products were less novel, and the new products sold less well. The most affected firms were smaller, younger, more dependent of external financing, and make more capital-intensive products, suggesting that credit frictions were responsible for the reduced innovation. Overall, these findings suggest that disruptions to credit markets make firms innovate less and less boldly.

Keywords: Innovation; Multi-Product Firms; Financial Constraints; Great Recession

JEL Classification: G11, G21, G31, G32, L15, L25, O31, O32