Abstract

http://ssrn.com/abstract=1746399
 
 

References (45)



 
 

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Does Stock Liquidity Enhance or Impede Firm Innovation?


Vivian W. Fang


University of Minnesota - Twin Cities - Department of Accounting

Xuan Tian


Indiana University - Kelley School of Business - Department of Finance

Sheri Tice


Tulane University - A.B. Freeman School of Business

May 29, 2013

Journal of Finance, Forthcoming

Abstract:     
We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation in this paper. This topic is of particular interest to firm stakeholders and regulators, because innovation is crucial for firm and national level competitiveness and stock liquidity can be altered by financial market regulations. We use a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes in the cost of trading stocks and find that an increase in liquidity causes a reduction in future innovation. We then identify two possible mechanisms through which liquidity impedes innovation: increased exposures to hostile takeovers and higher presence of institutional investors who do not actively gather information about firm fundamentals or monitor. Both could result in a cut in investment in innovation to boost current earnings. Our paper shows a previously under-identified adverse consequence of liquidity: its hindrance to promoting firm innovation.

Number of Pages in PDF File: 87

Keywords: Stock Liquidity, Innovation, Hostile Takeover, Institutional Ownership

JEL Classification: G12, G19, G34, G38, O31

Accepted Paper Series


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Date posted: January 24, 2011 ; Last revised: July 29, 2014

Suggested Citation

Fang, Vivian W. and Tian, Xuan and Tice, Sheri, Does Stock Liquidity Enhance or Impede Firm Innovation? (May 29, 2013). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1746399 or http://dx.doi.org/10.2139/ssrn.1746399

Contact Information

Vivian W. Fang
University of Minnesota - Twin Cities - Department of Accounting ( email )
321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States
Xuan Tian
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. Tenth Street
Bloomington, IN 47405
United States
812-8553420 (Phone)
824-8555875 (Fax)
HOME PAGE: http://kelley.iu.edu/tianx

Sheri Tice (Contact Author)
Tulane University - A.B. Freeman School of Business ( email )
A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5469 (Phone)
504-865-6751 (Fax)
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