Gustav Martinsson

Law, Stock Markets, and Innovation

We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long-run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.

Does Transparency Stifle or Facilitate Innovation

Corporate transparency reduces information asymmetries between firms and capital markets but increases the costs associated with information leakage to competitors. We explore how a countrys infor ...

What if Firms Could Borrow More? Evidence from a Natural Experiment

We study how liquidity constraints affect entrepreneurial activity using a temporary lending program introduced in Sweden at the height of the financial crisis. Firms could suspend payment of all labor-related taxes and fees, but any suspended payments were considered a fixed rate loan from the Swedish government. The structure of the program made it relatively more beneficial for firms with high ex ante labor expenses. Exploiting this aspect of the program to address endogenous selection into the program, we find that the increase in liquidity allowed participating firms to increase both net debt levels and rates of real investment spending. While these results highlight the existence and real impact of binding credit constraints in an important subset of entrepreneurial firms, our estimates suggest that fewer than 10 percent of economy-wide firms needed liquidity, even at the height of the crisis.We use a novel government policy, launched in Sweden in March 2009, to evaluate the consequences of financing constraints during a crisis. The policy is unique in that it allowed firms to temporarily suspend payment of their labor taxes, but any unpaid taxes were treated as a loan from the Swedish government. Moreover, the interest rate on the loan was set relatively high so as to appeal only to firms whose options for external finance disappeared. About 2,500 firms took advantage of the policy, effectively borrowing around five billion Swedish Krona (

Does Transparency Stifle Innovation? Evidence from R&D Activity in Different Information Environments

640 million U.S. dollars) in aggregate. We match information on firm use of the lending facility with micro-level data on the entire universe of Swedish limited liability firms. We show that: i) net debt levels increased for the firms taking advantage of the program, indicating they used the program to relieve financing constraints rather than to substitute for alternative financing sources, and ii) the funding supplied by the policy supported real investment and employment growth during the crisis. Taken together, our findings highlight the important impact financing constraints had on real activity during the crisis and show that the Swedish lending facility had a robust mitigating impact on these constraints, thereby supporting entrepreneurial activity in a time of adverse financial conditions.We study how liquidity constraints affect entrepreneurial activity using a temporary lending program introduced in Sweden at the height of the financial crisis. Firms could suspend payment of all labor-related taxes and fees, but any suspended payments were considered a fixed rate loan from the Swedish government. The structure of the program made it relatively more beneficial for firms with high ex ante labor expenses. Exploiting this aspect of the program to address endogenous selection into the program, we find that the increase in liquidity allowed participating firms to increase both net debt levels and rates of real investment spending. While these results highlight the existence and real impact of binding credit constraints in an important subset of entrepreneurial firms, our estimates suggest that fewer than 10 percent of economy-wide firms needed liquidity, even at the height of the crisis.

Financial Market Reform and Skill-Intensive Industry Growth

Corporate transparency reduces information asymmetries between firms and capital markets, but increases the costs associated with information leakage to competitors. We explore how a country’s information environment affects innovation, an activity characterized by high information asymmetries and potentially severe proprietary costs. Studying both long-run cross-country differences in the availability of firm-specific information to corporate outsiders, as well as quasi-experimental shocks to the information environment following transparency-enhancing security market reforms, we document significantly higher rates of R&D and patenting in richer information environments. The effects of transparency are strongest in industries that rely on external equity rather than bank debt, indicating that transparency facilitates innovation by reducing the information costs associated with arm’s-length financing. In contrast, transparency has no impact on physical capital accumulation, consistent with fewer information asymmetries in tangible assets. An economy’s information environment has important but heterogeneous effects on the nature and extent of real economic activity.Corporate transparency reduces information asymmetries between firms and capital markets, but increases the costs associated with information leakage to competitors. We evaluate the net effects of a country’s overall information environment by focusing on innovation, an economically important activity characterized by both high information asymmetries and potentially severe proprietary costs. Focusing on cross-country differences in the availability of firm-specific information to corporate outsiders, we find significantly higher rates of R&D investment in richer information environments. The information environment disproportionally affects R&D activity in sectors more reliant on external finance, indicating that transparency facilitates innovation by reducing information costs. We draw similar inferences by studying quasi-experimental shocks to the information environment arising from the first prosecution of insider trading and introduction of transparency-specific securities regulations in the European Union. Our work directly connects an economy’s transparency environment with the innovative activities that drive growth, and highlights unexplored economic consequences of transparency-related security market reforms.

Financial Factors and Patents

Financial markets in most developed economies were open to foreign investors before 1980, yet these countries continued to reform their financial systems dramatically in subsequent decades. During the same time period, high-skill industries become increasingly important; for example, in the US high-skill business services now account for over 20% of GDP, more than double their share in the late 1970s. I link the domestic financial reforms of the 1980s and 1990s to the growth of high-skill industries in a broad sample of countries and unveil a previously unexplored channel linking financial reform to growth in already financially open and developed economies.

Taxing Capital, Stunting Growth? Capital Income Taxes, Costly Equity Finance, and Investment in R&D

This paper conjectures that equity supply is crucial for firms in order to maintain a smooth patenting profile through time. This hypothesis is tested on Swedish firm-level observations from 1997 to 2005. Patent applications growth in Sweden has been highly volatile in recent years. During the economic downturn, following the burst of the IT-bubble, applications dropped substantially, but results here show that the downturn had little effect on the patenting of high-equity firms. Instead, the entire decline in patent applications is confined to firms with lower levels of equity. This effect is consistent across sectors, firm-size, corporate-affiliation, and human-capital intensity.

Do Financing Constraints Matter for R&D?

Higher taxes on corporate payouts increase the cost of financing with stock issues. As a result, real activities that depend on equity financing should be particularly sensitive to payout taxation. For example, firms rely extensively on stock issues to fund R&D spending, making R&D a potentially important but unexplored mechanism through which payout taxes affect real economic activity. In a broad international panel and in the years surrounding a quasi-experimental dividend tax reform in Sweden, we document a robust negative association between payout tax rates and R&D. Higher payout taxes have a stronger negative effect on R&D in sectors and firms that are more equity dependent, but little to no effect on investment in physical capital, consistent with the equity financing mechanism we emphasize. Given the importance of R&D for innovation and long-run growth, our findings suggest that the economic consequences of capital income taxation are likely much larger than is generally recognized.