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Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross section of US stock returns, we show that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms; and (ii) higher levels of the debt-to-GDP ratio predict higher risk premia for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent R&D activity and economic growth. We study these findings in a production-based asset pricing model with endogenous innovation as in Comin and Gertler (2006). By accounting for fiscal and political risk, our model reproduces several aspects of the empirical evidence.

The research of finance professor Mariano Massimiliano Croce focuses on asset pricing in general equilibrium models in which there is uncertainty about the long horizon perspectives of the economy (growth news shocks). Projects include the study of international asset prices and exchange rates; the interaction between asset prices, investment decisions, wealth and welfare on a global scale; links between investors’ information and asset prices; growth implications of fiscal policy risks.

He has published in leading academic journals such as, for example, The Journal of Political Economy, The American Economic Review, The Journal of Finance, The Review of Financial Studies, and The Journal of Monetary Economics.