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Government Debt and the Returns to Innovation

Author

Listed:
  • Schmid, Lukas
  • Croce, Mariano
  • Raymond, Steve
  • Nguyen, Thiên Tung
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 premia 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.

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  • Schmid, Lukas & Croce, Mariano & Raymond, Steve & Nguyen, Thiên Tung, 2018. "Government Debt and the Returns to Innovation," CEPR Discussion Papers 12617, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12617
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    Keywords

    Fiscal uncertainty; Cross section of stock returns; Predictability; R&d; Growth; Government debt;
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