Recent empirical studies show that innovative ﬁrms heavily rely on debt ﬁnancing. This paper investigates the relation between debt ﬁnancing, innovation, and growth in a Schumpeterian growth model in which ﬁrms’ dynamic R&D and ﬁnancing choices are jointly and endogenously determined. The paper demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level. The paper also shows that debt ﬁnancing has large eﬀects on ﬁrm entry, ﬁrm turnover, and industry structure and evolution. Lastly, it predicts substantial intra-industry variation in leverage and innovation, in line with the empirical evidence.
|Number of pages||58|
|Publication status||Published - 2020|
|Event||The 80th Annual Meeting of American Finance Association. AFA 2020 - San Diego, United States|
Duration: 3 Jan 2020 → 5 Jan 2020
Conference number: 80
|Conference||The 80th Annual Meeting of American Finance Association. AFA 2020|
|Period||03/01/2020 → 05/01/2020|