Stock Market Liquidity and Innovation Activity

70 Pages Posted: 27 Sep 2013 Last revised: 7 Jun 2014

See all articles by Lai Van Vo

Lai Van Vo

Western Connecticut State University

Date Written: April 20, 2014

Abstract

This paper investigates the effects of aggregate stock market liquidity on innovation at both aggregate and firm levels for publicly traded firms in the U.S. I show that both effects are significantly positive. Next, I provide two underlying mechanisms through which aggregate stock liquidity enhances innovation. First, high stock market liquidity reduces the cost of raising external capital, making it easier for firms, especially for small firms and those with R&D investments, to issue equity and finance their innovation. Second, high stock market liquidity generates high firm valuation and reduces transaction costs, motivating large firms to buy innovation from small firms through merger and acquisition activities. Overall, I document that, unlike Fang, Tian, and Tice (2013), who argue that stock liquidity impedes innovation at the firm level, aggregate stock market liquidity plays a very important and positive role in enhancing aggregate innovation.

Keywords: Stock Market Liquidity, aggregate innovation, patent, equity issuance, merger and acquisition

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

Suggested Citation

Vo, Lai Van, Stock Market Liquidity and Innovation Activity (April 20, 2014). Available at SSRN: https://ssrn.com/abstract=2330494 or http://dx.doi.org/10.2139/ssrn.2330494

Lai Van Vo (Contact Author)

Western Connecticut State University ( email )

Danbury, CT 06810
United States
203-837-9379 (Phone)

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