How Do Liquid Stocks Enhance the Economic Value of Patents?

52 Pages Posted: 24 Feb 2020 Last revised: 2 Jun 2020

See all articles by Hyun Joong Im

Hyun Joong Im

Peking University - HSBC Business School

Srinivasan Selvam

Peking University - HSBC Business School

Kelvin Jui Keng Tan

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: June 1, 2020

Abstract

Do liquid stocks make innovation more valuable? Exploiting the Russell index reconstitutions as a quasi-random experiment, we show that liquidity increases the economic value of innovation. These results are mainly driven by innovation-oriented firms, such as science-based firms, software-related firms, or specialized suppliers. We also show that liquid stocks improve information production and institutional monitoring, thereby instilling discipline in managers to increase focus on economically valuable innovation. In addition, liquid stocks promote performance-sensitive compensation, which incentivizes managers to pursue valuable innovation. A positive effect of stock liquidity on innovation value, together with a negative effect of stock liquidity on innovation quantity, suggests that liquid stocks push the manager to trade-off the quantity of innovation against the value of innovation in maximizing firm value.

Keywords: market value of innovation, stock liquidity, feedback mechanism, institutional monitoring

JEL Classification: D22, G30, O32

Suggested Citation

Im, Hyun Joong and Selvam, Srinivasan and Tan, Kelvin Jui Keng, How Do Liquid Stocks Enhance the Economic Value of Patents? (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3516442 or http://dx.doi.org/10.2139/ssrn.3516442

Hyun Joong Im (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, Guangdong 518055
China

Srinivasan Selvam

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

Kelvin Jui Keng Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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