Abstract
A positive stock market valuation of a firm’s innovative assets grants the firm credibility as an innovator, facilitates the financing of future R&D, and is, therefore, an important step towards a firm’s ability to create and sustain a competitive advantage. Using a dataset of publicly listed firms in China, we show that in weak institutional environments, characterized by weak property rights protection, insufficient law enforcement, and inefficient information disclosure and capital allocation, innovative assets face a lower market valuation. We, further, show that insider trading acts as a signal for the value of innovative assets. Insider trading mitigates the stronger information asymmetries in lesser developed institutional contexts and increases the stock market valuation of innovative assets.
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