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Government Debt and the Returns to Innovation

Mariano Massimiliano Croce, Thien Tung Nguyen, Steve McGregor Raymond and Lukas Schmid
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Mariano Massimiliano Croce: University of North Carolina
Thien Tung Nguyen: Ohio State University
Steve McGregor Raymond: University of North Carolina
Lukas Schmid: Duke University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Elevated levels of government debt raise concerns about their effects on long-term growth prospects. This study shows 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 premia for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms are associated with declines in subsequent R&D activity and economic growth. We study these findings in a production-based asset pricing model with endogenous innovation. By accounting for fiscal and political risk, our model reproduces several aspects of the empirical evidence.

JEL-codes: C62 F31 G12 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-ino, nep-knm, nep-mac, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2016-10

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