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Government debt and the returns to innovation

M.M. Croce, Thien T. Nguyen, S. Raymond and L. Schmid

Journal of Financial Economics, 2019, vol. 132, issue 3, 205-225

Abstract: Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross-section of US stock returns, we show that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms, and (ii) higher levels of the debt-to-GDP ratio predict higher risk premiums for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent productivity and economic growth. We propose a production-based asset pricing model with endogenous innovation and fiscal policy shocks that can rationalize key aspects of the empirical evidence. Our study highlights a novel and distinct risk channel shaping the link between government debt and future growth.

Keywords: Government debt; Fiscal uncertainty; Cross section of stock returns; Predictability; R&D; Growth (search for similar items in EconPapers)
JEL-codes: E62 H32 O33 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jfineco.2018.11.010

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