Market Sentiment and Innovation Activities

Journal of Financial and Quantitative Analysis, 2018

59 Pages Posted: 27 Jul 2020

See all articles by Zhaoxia Xu

Zhaoxia Xu

UNSW Australia Business School, School of Banking and Finance

Tri Vi Dang

Columbia University - Department of Economics

Date Written: June 25, 2018

Abstract

We investigate potential mechanisms through which market-wide sentiment affects firms’ innovation activities. We provide evidence for the financing channel by showing that financially constrained firms are more likely to issue equity and invest more in research and development (R&D) than financially unconstrained firms at high market sentiment. Using time-varying manager sentiment measures, we find suggestive evidence for a sentiment spillover channel whereby market sentiment affects R&D investments through influencing manager sentiment. Furthermore, better patent portfolios are produced from R&D investments stimulated by high market sentiment. Market sentiment has a stronger impact on R&D than the capital expenditures of financially constrained firms.

Keywords: Sentiment, Innovation, Financial Constraints

JEL Classification: G30, G12

Suggested Citation

Xu, Zhaoxia and Dang, Tri Vi, Market Sentiment and Innovation Activities (June 25, 2018). Journal of Financial and Quantitative Analysis, 2018, Available at SSRN: https://ssrn.com/abstract=3635191

Zhaoxia Xu (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Tri Vi Dang

Columbia University - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

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