The Innovator's Risk Premium: Sticky Hurdle Rates, the Cost of Capital, and Creative Destruction

Craig A. Chikis, Jonathan Goldberg and David López-Salido
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Craig A. Chikis: University of Chicago
Jonathan Goldberg: Board of Governors of the Federal Reserve System
David López-Salido: Banco de España

No 2628, Working Papers from Banco de España

Abstract: Firms' hurdle rates exceed their financial cost of capital. This gap varies across firms and has widened in the aggregate. In our Schumpeterian model, two frictions drive this gap: firm decision-makers require an innovator's risk premium for undiversifiable innovation risk, and innovation profits are imperfectly pledgeable. Higher undiversifiable risk lowers the financial cost of capital while hurdle rates remain sticky or even rise. Widening gaps weaken creative destruction; profits and superstar valuations rise despite firms forgoing positive-NPV projects. The calibrated model matches cross-sectional patterns in gaps, R&D, market power and firm dynamics, and explains weak productivity growth and declining dynamism.

Keywords: hurdle rates; cost of capital; idiosyncratic risk; innovation; market power; firm valuations (search for similar items in EconPapers)
JEL-codes: E43 G12 G31 G32 O31 (search for similar items in EconPapers)
Pages: 104 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2628e

DOI: 10.53479/44406

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