The possible impact of debt on innovation and growth

© 2022 EPFL

© 2022 EPFL

Prof. Erwan Morellec together with Prof. Thomas Geelen (Copenhagen Business School) and Prof. Jakub Hajd (HEC Montreal) have published an article in the Review of Financial Studies entitled "Can Corporate Debt Foster Innovation and Growth"?


Recent empirical studies show 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 focuses solely on incumbents when measuring the effects of debt on investment.

Read the paper online