Does Stock Liquidity Enhance or Impede Firm Innovation?
Vivian W. Fang,
Xuan Tian and
Journal of Finance, 2014, vol. 69, issue 5, 2085-2125
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.
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:69:y:2014:i:5:p:2085-2125
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