Real Asset Liquidity and Corporate Innovation
59 Pages Posted: 17 Feb 2015
Date Written: February 15, 2015
We present a theoretical model and empirical evidences that liquid real asset, which is of high liquidation value, provides an alternative internal channel for supporting corporate innovations. We employ a simple two-period model in which existing assets can be liquidated or placed as collateral to raise funds to invest in innovation. Our model predicts that a firm’s real asset liquidity is positively associated with corporate innovations. Moreover, this positive effect is more profound for firms with fewer financial constraints and in a less competitive product market. We test these predictions by utilizing a novel real asset liquidity index and U.S. patent data from 1986-2006. We find robust evidence supportive of our theoretical predictions. Our results suggest that firms with higher asset liquidity are more likely to pursue technological innovation.
Keywords: Asset Liquidity, R&D, Innovation
JEL Classification: G34, O32
Suggested Citation: Suggested Citation