Does Stock Liquidity Enhance or Impede Firm Innovation?
Open accessAbstract
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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Because liquidity makes it easier for investors to sell shares, it could reduce their incentives to screen and monitor complex investments such as innovation.
“Second, since liquidity makes it easier for investors to sell shares, this could reduce their incentives to engage in the painstaking process of screening and monitoring complex investments, such as investment in innovative.”
From Finance, Growth, and Inequality (2021) · cites this paper as Fang, Tian, and Tice (2014)
Regulatory reforms that increased stock market liquidity reduced innovation.
“Using firm-level data from the United States, they show that regulatory reforms that increased stock market liquidity reduced innovation.”
From Finance, Growth, and Inequality (2021) · cites this paper as Fang, Tian, and Tice (2014)
A decline in the screening and governance of innovation can interfere with the efficiency with which firms invest in innovation.
“A decline in the screening and governance of innovation can interfere with the efficiency with which firms invest in innovation.”
From Finance, Growth, and Inequality (2021) · cites this paper as Fang, Tian, and Tice (2014)
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Low-carbon innovation induced by emissions trading in China
Zhu, J., Fan, Y., Deng, X., & Xue, L. (2019) · Nature Communications · doi:10.1038/s41467-019-12213-6 · Cited by 467 · see citing works
Finance, Growth, and Inequality
Levine, R. (2021) · IMF Working Papers · doi:10.5089/9781513583365.001 · Cited by 62 · see citing works
- Authors
- FANG, V. W., TIAN, X., & TICE, S.
- Affiliations
- Tulane University (US)
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2014-09-12
- Volume
- 69
- Issue
- 5
- Pages
- 2085-2125
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2757815757
- Cited by
- 1,339
- References
- 0
- Citations by year
- 2026: 125 · 2025: 165 · 2024: 172 · 2023: 154 · 2022: 156 · 2021: 124 · 2020: 101 · 2019: 72 · 2018: 70 · 2017: 61 · 2016: 35 · 2015: 43 · 2014: 29 · 2013: 17 · 2012: 8
- FWCI
- 238.07
- Type
- journal article
- Language
- en
- Open access
- green
- doi.org
- Locations
- The Journal of Finance (publishedVersion)
- SSRN Electronic Journal (acceptedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Funders
- A.B. Freeman Chair in Finance at the A.B
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Firm Innovation and Growth
- Keywords
- stock liquidity, business innovation, hostile takeovers, institutional investors, financial regulation, corporate governance, innovation incentives
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