Asset Liquidity and Firm Innovation

Abstract

This paper examines the effects of asset liquidity on innovation investment. We show that firms with high liquid assets tend to invest more in research and development (R&D) and generate high number of patents and patent citations, even after controlling for stock liquidity and other firm’s characteristics. We further document that this effect is more pronounced for firms with high cash flow uncertainty or less capacity to access external equity capital. Using asset sales as a quasi-natural experiment to detect the change in firms’ asset liquidity, we show that asset sales are significantly positively related to R&D investment. Overall, our findings show that asset liquidity is an important determinant of innovation investment.