Nexus between corporate innovation and investor sentiment: empirical evidence from the US

Abstract

PurposeThis study examines the connection between investor sentiment and corporate innovation in the United States, considering the magnitude of corporate information asymmetry, the implied cost of capital and the financial constraints.Design/methodology/approachThe authors employ a two-step GMM framework to examine the hypotheses of this study by utilizing annual data from 2001 to 2021 for US corporations.FindingsThe empirical evidence demonstrates a significant impact of investor sentiment on corporate innovation for firms with a lower information asymmetry and implied cost of capital than those with a higher information asymmetry and cost of capital. Although the financial constraint channel remained positive, it had little impact on the innovations of US corporations. Overall, the study's results show that companies make more valuable and high-quality patents when investors are optimistic.Practical implicationsThis research has policy implications for all managers, investors, analysts and state officers, particularly in the USA and other developed countries. Managers and investors of all types should predict the role of corporate innovation in increasing shareholder wealth.Originality/valueTo the authors' knowledge, this is the first study to examine the relationship between investor sentiment and corporate innovation in the United States, considering the extent of corporate information asymmetry, the implied cost of capital and the financial limitations. The study's empirical findings uniquely contribute to the existing literature on corporate innovation and investor sentiment in the current context.