Stock Liquidity And Firm Innovation

With the rapid development of China’s economy since the 20th century, China’s stock market has experienced a continued reform and progress, the achievement of market size and size of transactions has reached higher and higher levels. Thirteenth Five-Year Plan was clearly made to further increase the proportion of direct financing of enterprises so that the stock market has become the main choice for promoting the corporate financing. But in this context, China’s innovation capability has not essentially improved. Purpose of this paper is to explore a longstanding debate on whether stock liquidity enhances or impedes firm innovation when the government continues to release liquidity.In this paper, we used the least squares regression and difference-in-differences model, selected 789 listed companies before 2000, collected all day transactions and corporate identity data from 2000 to 2010, relied on the exogenous variation in liquidity generated by reform of non-tradable shares, we found that an increase in liquidity causes a reduction in future innovation. OLS regression results showed the negative correlation between improved stock liquidity and the output of innovation one、two and three years later. The liquidity increase of every unit stock will reduce the number of patent applications by 12.2% and decrease non-self citations by 10.3%. The difference-in-differences model established a causal relationship between stock liquidity and firm innovation. When the reform of non-tradable shares-exist in 2005, we found that compared to those companies whose stock liquidity experienced less increase since the reform, the innovation output will experienced a greater reduction for those more increase in liquidity. When using dynamic data before and after the seven-year window of the share reform, the result is still robust, which proved that the more liquidity increases, the greater output of innovation decline.This article also explores some of the possible mechanisms, two mechanisms will lead to this result:the first point, institutional investors will chase short-term benefits when liquidity is high, these institutional investors make corporate managers concern more about the short-term interests than long-term investment in innovation; the second point, when a company’s stock liquidity increase, it is more likely to be purchased by potential acquirers, leading greater pressure of being acquired, companies are reluctant to spend too much in terms of innovation. In addition, frequently proxy fight, Comprising equity incentive salary system, the high proportion of large shareholders and the short-sighted management strategies of market value also may be other factors that cause decline in innovation.Finally, the article gives some policy recommendations. The state authority shall develop the capital market step by step, release the liquidity of the securities market gradually, make further efforts on regulating the supervision of the institute investors and finance industry, so that the environment for innovation of the enterprises can be improved, and the overall ability of innovation of the enterprises, as well as the whole country can be strengthened.