Quantitative easing and corporate innovation

Working Paper Series

Niklas Grimm, Luc Laeven, Alexander Popov Quantitative easing and

corporate innovation

No 2615 / November 2021

Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Abstract

To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt nancing conditions induced by corporate debt purchases under the ECB's Corporate Sector Purchase Program. Companies eligible for the program increase signicantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained rms.

Keywords: Unconventional monetary policy, quantitative easing, corporate innovation, productivity growth

JEL Classication: E5, G10, O3

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Non-technical summary

Economic growth depends crucially on productivity-enhancing intangible investments such as research and development (R&D). In turn, R&D investment is costly, and therefore rms' ability to engage in technological innovation can be impaired during the down phase of the business cycle when funding costs are generally higher. From the point of view of monetary policymakers, an important challenge is how to stimulate R&D investment when nancial markets are impaired and monetary policy is at or below the Zero Lower Bound. This question is especially important given that in the wake of the Global Financial Crisis, a number of Central Banks have resorted to sizeable asset purchase programs|such as the Fed's Large Scale Asset Purchases (LSAP) and the Corporate Sector Purchase Program (CSPP) of the European Central Bank (ECB)|in order to stimulate the economy.

In this paper, we analyze the impact of the CSPP on corporate R&D investment. Announced in March 2016 as an attempt to enhance the monetary transmission mechanism at record low policy rates, the CSPP committed the ECB to purchasing eligible corporate bonds under strict conditionality, and marked the rst time that non-nancial corporate bonds became part of the ECB's QE policies. We expect that the CSPP reduced funding costs for eligible rms and boosted their growth prospects, rendering R&D investments more protable. The dierential eect on eligible and non-eligible rms makes it possible to compare R&D investment patterns by otherwise similar rms on both sides of, but close to, the eligibility threshold.

Our main nding is that CSPP-eligiblenon-nancial companies increased signicantly and substantially their investment in R&D, compared to companies right below the CSPP rating threshold. The increase in corporate R&D investment is between 9% and 20%, depending on the empirical speci cation. We also nd important dynamic eects. In particular, the instantaneous eect of the CSPP on R&D is zero; it becomes signicant in the rst year after the Program; and then it increases by about 50% in each subsequent year. The evidence is consistent with the notion that in the presence of high adjustment costs, and when faced with improving funding conditions, rms increase their R&D

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investment slowly and gradually.

Second, we document substantial rm-level heterogeneity in the e ect of the CSPP on R&D investment. In particular, we nd that R&D investment does not increase more for companies with relatively low cash ow, interest coverage, or dividend payout ratio. We also nd that the e ect of the CSPP on corporate R&D investment is independent of the company's return on assets and equity, as well as of the volatility of the company's return on assets and equity. At the same time, the increase in corporate R&D in response to more favorable external funding conditions is stronger for rms that prior to the introduction of the CSPP had relatively higher levels of R&D investment, intangible investment, and number of patents, as well as for low-leverage companies. Our ndings thus suggest that QE stimulates innovation through a wealth transfer to high-quality innovative companies, and not by supporting credit constrained ones.

Our results are important in two di erent ways. First, the evidence we document is consistent with the idea that access to nance matters at all stages of the life cycle of innovation. While much of the literature has focused on the role that nancing constraints play in the innovation decisions of young rms, we show that they also matter in a material way for a certain class of mature rms, too. Second, our evidence suggests that increased funding to the real economy via QE programs is associated with an increase in R&D investment which is notoriously dicult to collateralize. This is especially important in light of recent evidence that intangible investment|such as intellectual property, organizational structure, business strategy, and brand equity|now dominates tangible investment in advanced economies, reducing Central Bank's ability to stimulate economic growth via its preferred channel, the "bank lending" one. Our results suggest that by expanding their toolbox of operational policies, Central Banks can continue supporting today's knowledge-based economies. However, they also caution against blanket support of rms, and speak to the notion that policies need to be designed such that they support rms with high elasticity of investment to the cost of external nance.

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• Introduction

Economic growth depends crucially on productivity-enhancing intangible investments such as research and development (R&D). In turn, R&D investment is costly, and therefore rms' ability to engage in technological innovation can be impaired during the down phase of the business cycle when funding

costs are generally higher (Aghion, Angeletos, Banerjee, and Manova, 2010).1 From the point of view of monetary policymakers, an important challenge is how to stimulate R&D investment when nancial markets are impaired and monetary policy is at or below the Zero Lower Bound. While a number of recent studies have analysed the impact of conventional monetary policy on Total Factor Productivity (TFP) growth (Moran and Queralto, 2018; Anzoategui, Comin, Gertler, and Martinez, 2019; Bianchi, Kung, and Morales, 2019), the link between the evolution of productivity-enhancing investment and Quantitative Easing (QE) has largely been overlooked. This omission is all the more surprising given that in the wake of the Global Financial Crisis, a number of Central Banks have resorted to sizeable asset purchase programs|such as the Fed's Large Scale Asset Purchases (LSAP) and the Corporate Sector Purchase Program (CSPP) of the European Central Bank (ECB)|in order to stimulate the economy.

We go to the heart of this question by analyzing the impact of the CSPP on corporate R&D invest- ment. Announced in March 2016 as an attempt to enhance the monetary transmission mechanism at

record low policy rates,2 the CSPP committed the ECB to purchasing eligible corporate bonds under

strict conditionality.3 This marked the rst time that non-nancial corporate bonds became part of the ECB's QE policies. The theoretical justication behind such central bank purchases of risky private debt is that they can reduce the cost of credit and boost real economic activity when nan- cial intermediaries face balance sheet constraints (Curdia and Woodford, 2011; Gertler and Karadi,

• Financial frictions are often considered one of the primary reason for the observed procyclicality of R&D investment (Geroski and Walters, 1995; Fatas, 2000; Comin and Gertler, 2006; Barlevy, 2007; Aghion, Askenazy, Berman, Cette, and Eymard, 2012), which arises despite well understood theoretical arguments that rms will concentrate investment in innovation in recessionary periods when productivity-enhancing activities have a lower opportunity cost (Schumpeter, 1939).

• The ECB's deposit facility rate has been negative since June 2014.

• Broadly speaking, the ECB would purchase euro-denominated bonds with a rating of BBB- or higher and remaining maturity of at least 6 months, issued by companies domiciled in the euro area.

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