Does Stock Liquidity Enhance or Impede Firm Innovation?

Vivian W. Fang, Xuan Tian and Sheri Tice

Journal of Finance, 2014, vol. 69, issue 5, 2085-2125

Abstract: type="main">

We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation. This topic is of interest because innovation is crucial for firm- and national-level competitiveness and stock liquidity can be altered by financial market regulations. Using a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation. We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor.

Date: 2014
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