How Do Liquid Stocks Enhance the Economic Value of Patents?
52 Pages Posted: 24 Feb 2020 Last revised: 2 Jun 2020
Date Written: June 1, 2020
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: Suggested Citation