Does stock liquidity enhance or impede firm innovation?

Vivian W Fang, Xuan Tian, Sheri Tice

Research output: Contribution to journalArticlepeer-review

670 Scopus citations


We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation. This topic is of interest because innovation is crucial for firm- and national-level competitiveness and stock liquidity can be altered by financial market regulations. Using a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation. We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor.

Original languageEnglish (US)
Pages (from-to)2085-2125
Number of pages41
JournalJournal of Finance
Issue number5
StatePublished - 2014

Bibliographical note

Publisher Copyright:
© 2014 the American Finance Association.


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