Capital Market Development's Impact on Firm Innovation: Perspective from Stock Liquidity

Abstract

Abstract:

This paper studies stock liquidity's impact on firm innovation and its mechanism in an effort to provide empirical evidence for the driving role that stock market development plays in economic development. With trading data, financial data and patent-related data of A-share listed companies, this paper conducts an empirical analysis and regress firm innovation on stock liquidity using truncated regression. Then we use dynamic panel date model to control endogeneity and mediation test to study how stock liquidity affects firm innovation. Empirical result shows that firms with higher stock liquidity gain remarkable advantage in patent holding and intangible asset value. We identify two possible mechanisms partly through which liquidity enhances innovation:the first is liquidity helps alleviate financing constraints and increase investment on innovation, and the second is attracting higher presence of mutual funds that actively monitor and improve the efficiency of innovation. As robustness analysis, from the perspective of quasi-natural experiment we use propensity score matching, Mahalanobis matching, and bias corrected matching to control heterogeneity and self-selection effect and testify that liquidity enhances firm innovation. This paper verifies that stock market liquidity helps enhance firm innovation and this conclusion provides empirical evidence for supply-side reform through development of stock market.

Key words: firm innovation, stock liquidity, corporate finance, institutional ownership

Yan Honglei, Zhang Zili, Zhao Shengmin. Capital Market Development's Impact on Firm Innovation: Perspective from Stock Liquidity[J]. , 2020, 32(3): 21-36.

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