Abstract
Stock market has become a crucial financing channel for firms nowadays. As an important dimension of the characteristics of stock market, how will stock liquidity affect firm innovation? What are the underlying mechanisms? Those questions need to be explored further. Using Chinese non-financial A-share listed companies which had disclosed R&D expenditures in year 2006 to 2016 as the study sample, this paper investigates the effect of stock liquidity on firm innovation. The result shows that stock liquidity has a significant and positive effect on firm innovation. My finding is supported by additional test using Heckman sample selection model and several robustness tests. Further analysis shows that stock liquidity improves firm innovation by reducing financing constraints and increasing agency costs. This paper deepens the research on firm innovation from the perspective of market microstructure and owns implication for the government to encourage investment in R&D and will lead to develop multi-tiered capital markets.
Highlights
The importance of innovation for a country has been widely recognized
My study has the following contributions: (i) this paper provides one more new empirical evidence on the economic consequences of stock liquidity; (ii) in order to make my study more in line with the characteristics of Chinese financial market (Investors in Chinese financial market are more likely to pursue short-term interests) and the Chinese firm's conditions (Chinese firms are facing severe external financing constraints and internal governance deficiencies), I examine the possible underlying mechanisms: financing constraints mechanism and agency costs mechanism
The Heckman two-stage regression model includes two regression equations, one is the principal equation which is for the estimation of the correlation between stock liquidity and firm innovation, and the other one is the equation for sample selection
Summary
The importance of innovation for a country has been widely recognized. Advancement of science and technology is critical for economy updating and sustainable economic growth. As one of the most important characteristics of stock market, is thought to be one of the factors that may affect the innovation activities of firms. In this context, this paper analyses the relationship between stock liquidity and firm innovation with panel data of the annual reports of Chinese A-share listed firms from 2006 to 2016 and further analyses its mechanisms. My study has the following contributions: (i) this paper provides one more new empirical evidence on the economic consequences of stock liquidity; (ii) in order to make my study more in line with the characteristics of Chinese financial market (Investors in Chinese financial market are more likely to pursue short-term interests) and the Chinese firm's conditions (Chinese firms are facing severe external financing constraints and internal governance deficiencies), I examine the possible underlying mechanisms: financing constraints mechanism and agency costs mechanism.
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