Does Stock Liquidity Kill Innovation Investment? Evidence from Chinese Listed Firms

Abstract

Stock liquidity is one crucial financial consideration for investors, which will inevitably affect the equity financing of innovation activities. It is urgent and necessary to investigate the role of stock liquidity on innovation behaviors. Employing the panel datasets that cover 5920 private manufacturing firms listed in China during 2013-2018, we empirically study the impact of stock liquidity on firm innovation investment. Results show that there is a significant inverted U-shaped relationship between stock liquidity and innovation investment, indicating that stock liquidity is a double-edged sword regarding firm innovation. Specifically, the increase of stock liquidity will reduce the cost of stock transactions and attract major shareholders, while active monitoring of major shareholders will promote firm innovation. However, excessive liquidity will increase the pressure on firms to be takeovers, which will lead to short-sighted behavior of firm executives to reduce their investment in long-term innovation activities. Therefore, maintaining moderate stock liquidity could drive firm’s innovation, and the excessive stock liquidity could hurt firm’s innovation. By bridging the financial market research with firm innovation literature, this study generates crucial empirical evidence for technology innovation management theory and practice.