The Role of Investor Sentiment in the Diffusion of Technological Innovation

Abstract

I study the effect of investor sentiment on the relation between firm-level R&D and lagged economy-wide technological innovation. Following periods of intense technological progress, firms have an incentive to invest in R&D to, for instance, imitate technological leaders or to understand how to best use a new technology. However, frictions like financing constraints and informational externalities can lower R&D. Investor sentiment is known to positively affect corporate investment, which implies that sentiment might counteract the frictions that reduce R&D. I find that rapidly improving sentiment strengthens the effect of innovation on one-year-ahead R&D, in particular for financially-constrained high-tech firms.