Capital Misallocation and Innovation

40 Pages Posted: 5 Dec 2019 Last revised: 2 Nov 2020

See all articles by Christian Schmidt

Christian Schmidt

University of Mannheim

Yannik Schneider

University of Mannheim

Sascha Steffen

Frankfurt School of Finance & Management

Daniel Streitz

Copenhagen Business School

Date Written: November 1, 2020

Abstract

This paper documents that "zombie" lending by undercapitalized banks distorts competition and impedes corporate innovation. This misallocation of capital prevents both the exit of zombie and entry of healthy firms in affected industries adversely impacting output and competition. Worse, capital misallocation depresses patent applications, particularly in high technology- and R&D-intensive sectors, and industries with neck- and-neck competition. We strengthen our results using an IV approach to address reverse causality and innovation survey data from the European Commission. Overall, our results are consistent with externalities imposed on healthy firms through the misallocation of capital.

Keywords: innovation, capital misallocation, competition, zombie lending

Suggested Citation

Schmidt, Christian and Schneider, Yannik and Steffen, Sascha and Streitz, Daniel, Capital Misallocation and Innovation (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3489801 or http://dx.doi.org/10.2139/ssrn.3489801

Christian Schmidt

University of Mannheim ( email )

L9, 1-2
Mannheim, 68131
Germany

HOME PAGE: http://https://www.bwl.uni-mannheim.de/en/albrecht/team/doctoral-students/schmidt/

Yannik Schneider

University of Mannheim ( email )

Universität Mannheim L9, 1-2
Chair of Finance
Mannheim, 68161
Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Daniel Streitz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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