Silvio Vismara

Schumpeterian arguments of “creative destruction” predict that innovation is countercyclical.However, empirical findings demonstrate the contrary. We apply corporate finance principles toinnovation economics and propose a “hurdle-rate theory of inventive procyclicality.” Macroeco-nomic episodes of high equity risk premia (ERP) stifle innovation in our sample of U.S. firmsbecause many R&D projects do not pass corporate budgeting decisions when the aggregate dis-count rate is high. Consistent evidence suggests that the discount rate effect is less pronounced in firms with financial slack, weak product market competition, and institutional investor own-ership with long-term orientation. In an attempt to reconcile our procyclical empirical evidencewith Schumpeter’s countercyclical theory, we show that firms engaging in exploratory researchsuffer less during high-ERP episodes than those focusing on exploitative research, and patentsdeveloped during high-ERP periods have a higher technological impact and receive significantlymore forward citations. Finally, we exploit the staggered variation in state-level R&D tax creditsin difference-in-differences analyses to establish a causal link between the ERP and patent value.