This paper analyses how financial regulation that increases investors' effective risk aversion impacts economic growth. I collect and digitise a new dataset of stock holdings for a large fraction of the British pension sector. Using a regulatory reform that tightened risk requirements on pension funds as a natural experiment, I estimate how their subsequent divestment from equity markets affected firms' investment decisions. I show that firms more exposed to pension investors before the reform saw a fall in stock prices and a rise in risk premia. In response, these firms cut their capital and R&D expenditure, and reduced the fraction of long-term investment. These effects persist almost ten years after the reform. To interpret my findings, I embed a portfolio choice model with risk-averse investors in a Schumpeterian growth framework. Equity markets are segmented and only a limited number of investors hold stocks. Investor capital is concentrated in large firms who invest in risky projects. While tighter regulation raises the risk premium and reduces incumbent R&D, it also influences outsiders' entry decision. When the rise in the risk premium is sufficiently strong, market entry falls. Quantitative simulations suggest that pension schemes' divestment from equities, which was equivalent to approximately 3 percent of market capitalisation, generated a 0.14 percentage-point drop in annual growth.

We develop a model of endogenous growth and firm dynamics with soft budget constraints, where firms differ in their innovation speed and slower firms need additional financing in order to eventually innovate. As creditors cannot anticipate refinancing needs in advance nor credibly commit to withholding future refinancing, a Soft Budget Constraint Syndrome emerges, causing more activity by slow incumbents and crowding out potentially more efficient innovators. The resulting trade-off between the positive effects of budget constraint softening on innovation by incumbents and its negative effect on entry by fast innovators, generates a hump-shaped relationship between refinancing costs and aggregate growth. Calibrating the model to French firm-level data, we show that the budget constraint softening associated with the combination of an under-capitalized banking system and a decline in interest rates in the aftermath of the Global Financial Crisis accounts for 54% of the observed drop in the aggregate growth rates post-crisis. Although the softening in budget constraints has had a positive effect on incumbent innovation, this was more than offset by the resulting decrease in the entry rates of good firms.

How do banks shape firm turnover and creative destruction? This paper develops a growth model in which creative destruction is driven by the decision of banks to liquidate long-term loans with high default risk. We show analytically and quantitatively that policies aimed at encouraging more loan liquidation (e.g., reformed insolvency laws) do not only accelerate firm turnover and  improve aggregate productivity, but also foster firm creation and  boost growth. Such improvements at the exit margin complement policies designed to stimulate firm creation (e.g., start-up subsidies). The complementarity between entry and exit emerges because loan liquidation releases funds for new lending and thus relaxes the aggregate funding constraint, leading to a lower interest rate that benefits new firms. Due to this interest rate effect, tighter bank capital regulation may even increase firm creation whenever bank funding is inelastic.

What is the interaction between real interest rates and economic growth? This paper introduces a model in which real interest rates affect the direction of creative destruction through changes in financial intermediaries' portfolio allocation. Faced with regulatory or financial constraints that limit the size of their balance sheets, intermediaries evaluate new investment opportunities against the going-concern value of their legacy investments. Low real rates decrease the opportunity cost of continuing low-return projects and slow down the reallocation of capital towards high-productivity investments. A long-run decline in real rates has a hump-shaped effect on growth: When real rates are initially high, there is too much reallocation. Falling rates are expansionary. When real rates are already low, there is not enough reallocation and a further decrease depresses growth. Sustained downward pressure on real rates gives rise to a boom-bust cycle. Policies that encourage reallocation, such as tax deductions on unrealised losses, foster growth.

This paper analyses the investment activity and performance of pension schemes in private equity markets. Using a new data set on the historical asset allocation and returns of British Local Government Pension Schemes (LGPS), I document three trends: (i) there has been a steady increase in private market exposure since the pension reforms of 2004; (ii) pension schemes with historically low portfolio returns have shifted a larger fraction of their capital towards private markets; and (iii) these schemes subsequently did not outperform common public equity benchmarks.

For the last twenty years, corporate bankruptcy rates as a share of firm exit have been declining. We argue that this trend is precipitated by a rise in the importance of intangible knowledge capital and a decline in the importance of physical assets. Because the current bankruptcy code has been designed to facilitate the reallocation of physical capital between firms, it is no longer fit for purpose. This paper builds a model of creative destruction in which firms endogenously choose investment, capital structure, and bankruptcy. A rise in the importance of knowledge capital leads to an initial boom in investment and corporate bankruptcies, and to a subsequent steady decline in corporate restructuring, firm turnover, and investment. The economy's inability to restructure insolvent knowledge-intensive firms encourages the emergence of zombie firms, and culminates in a protracted growth slow-down.