Can Corporate Debt Foster Innovation and Growth?

Thomas Geelen, Jakub Hajda, Erwan Morellec*

*Corresponding author for this work

Research output: Contribution to journalJournal articlepeer-review

Abstract

Recent empirical studies have shown that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that solely focuses on incumbents when measuring the effects of debt on investment.
Original languageEnglish
JournalReview of Financial Studies
Number of pages67
ISSN0893-9454
DOIs
Publication statusPublished - 1 Dec 2021

Bibliographical note

Epub ahead of print. Published online: 1 December 2021

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