Economic policy uncertainty, cost of capital, and corporate innovation
Journal of Banking & Finance, 2020, vol. 111, issue C
We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel.
Keywords: Economic policy uncertainty; Implied cost of equity; Cost of debt; Innovation (search for similar items in EconPapers)
JEL-codes: G31 G32 G38 O30 M41 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:111:y:2020:i:c:s0378426619302729
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