The Hurdle-Rate Effect on Patents: Equity Risk Premium and Corporate Innovation by Public Firms in the U.S., 1977-2018

52 Pages Posted: 1 May 2023 Last revised: 9 May 2023

See all articles by David B. Audretsch

David B. Audretsch

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Wolfgang Drobetz

University of Hamburg

Eva Elena Ernst

University of Hamburg

Paul P. Momtaz

Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies; CESifo (Center for Economic Studies and Ifo Institute)

Silvio Vismara

University of Bergamo

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2023

Abstract

We document high economy-wide correlations between the Equity Risk Premium (ERP) and the aggregate volume (rho=-0.69) and value (rho=-0.75) of patenting activity by public firms in the United States over the 1977-2018 period, contradicting Schumpeter's (1939) opportunity-costs hypothesis of countercyclical inventive productivity in a representative sample. We propose a ''hurdle-rate theory of inventive procyclicality'' and offer supportive evidence at the firm level. High-ERP periods stifle innovation because many R&D projects do not pass corporate budgeting decisions when discount rates are high. Consistent evidence suggests that the hurdle-rate effect is less pronounced in firms with financial slack, institutional ownership with long-term orientation, and weak product-market competition. In an attempt to reconcile the procyclical evidence with Schumpeter's countercyclical theory, we show that firms engaging in exploratory search suffer less during high-ERP episodes than those focusing on exploitative search, and patents developed during high-ERP periods have a higher technological impact and receive significantly more forward citations. Finally, we exploit the staggered variation in state-level R&D tax credits in difference-in-differences analyses to establish a causal link between the ERP and patent value.

Keywords: corporate innovation, patents, R&D, equity risk premium, financing conditions

JEL Classification: E44, G31, O31

Suggested Citation

Audretsch, David B. and Drobetz, Wolfgang and Ernst, Eva Elena and Momtaz, Paul P. and Vismara, Silvio, The Hurdle-Rate Effect on Patents: Equity Risk Premium and Corporate Innovation by Public Firms in the U.S., 1977-2018 (April 19, 2023). Available at SSRN: https://ssrn.com/abstract=4423719 or http://dx.doi.org/10.2139/ssrn.4423719

David B. Audretsch

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Eva Elena Ernst

University of Hamburg ( email )

Hamburg

Paul P. Momtaz (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, 80333
Germany

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
Malet Place London WC
London, London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Silvio Vismara

University of Bergamo ( email )

Via dei Caniana
2
Bergamo, 24127
Italy
24127 (Fax)

HOME PAGE: http://https://scholar.google.it/citations?user=Sa8sBkoAAAAJ&hl=en

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