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Wu et al ‘21
(Ruchith Dissanayake Queensland University of Technology - School of Economics and Finance Yanhui Wu Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN) Huizhong Zhang Queensland University of Technology - School of Economics and Finance, “Military Spending Shocks and Private Sector Innovation,” pg online @ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3082217 //um-ef)
The literature shows that increases in government expenditure could be paid off by public debt, which can adversely affect corporate investment and debt financing policies (McDonald 1983; Benninga & Talmor 1988; Krishnamurthy & Vissing-Jorgensen 2012; Graham et al. 2014; Graham et al. 2015). Graham et al. (2015), for example, report that government borrowing “crowds out” corporate debt financing through competition for investor funds. To the extent that different securities are imperfect substitutes in an investor's portfolio, increases in the supply of government debt reduce the demand for competing securities such as corporate bonds, pushing up the relative cost of corporate debt capital. Consequently, it could be the case that, following an increase in government spending, firms cut back on investment in innovation because of a rise in the cost of corporate debt financing rather than a decrease in demand.