Financing innovation: A hurdle rate theory of inventive procyclicality
David Audretsch, Wolfgang Drobetz, Eva Elena Ernst, Paul P. Momtaz, Silvio Vismara
Research Policy · 2026 · Volume 55 · Issue 8
DOI: 10.1016/j.respol.2026.105565
Abstract
Schumpeterian arguments of “creative destruction” predict that innovation is countercyclical. However, empirical findings demonstrate the opposite. We apply corporate finance principles to innovation economics and propose a “hurdle-rate theory of inventive procyclicality.” In our 1977–2018 sample of U.S. firms, macroeconomic episodes of high equity risk premia (ERP) hinder innovation because many R&D projects fail corporate budgeting decisions when the aggregate discount rate is high. Using the staggered variation in state-level R&D tax credits, we conduct a difference-in-differences analysis to establish a causal link between the ERP and patent value. In line with our hurdle-rate theory, we demonstrate that high-ERP episodes negatively impact firms that focus on exploratory search more than their exploitative counterparts. Evidence consistently suggests that the hurdle rate effect is less pronounced in firms with financial slack, weak product market competition, and high institutional investor ownership.
Keywords
Corporate innovation, Equity risk premium, Financing conditions, Hurdle rate theory, Patents, R&D
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