Does Stock Liquidity Kill Firm Innovation?The Role of Executive Share Incentive

Abstract

As an important factor that affects the capital market's efficiency, stock liquidity has an important impact on firm innovation activities. However, there is still considerable controversy in academia as to whether stock liquidity can improve the level of firm innovation. This paper takes the 2007-2019 Chinese Shanghai and Shenzhen A-share listed firms as a research sample, introduces the important variable of executive share incentives, and deeply studies the impact of stock liquidity on firm innovation. The research results show that there is a significant inverted U-shaped relationship between stock liquidity and firm innovation. The increase in stock liquidity can reduce firms' actual financing costs and facilitate the entry of major shareholders and increase the number of executives to conduct innovative research and development. The desire for long-term investment, however, excessive liquidity will drive institutional investors to short-term arbitrage, increase the pressure of firms to be acquired, aggravate the short-sighted behavior of executives, and inhibit firm innovation. Further research shows that executive share incentives significantly regulate the relationship between stock liquidity and firm innovation. Executive share incentives can ease principal-agent conflicts, drive executives to review the situation, cater to shareholders' interests, improve innovative decision-making, optimize investment structure, and enhance the firm Innovation level. This study enriches the relevant theoretical research on firm innovation from the cross-over perspective of firm external capital markets and internal executive incentives. Meanwhile, it provides management enlightenment for firms in the new era to better carry out innovation activities and enhance technological innovation capabilities.