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Asset liquidity and firm innovation

Author

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  • Pham, Ly Thi Minh
  • Vo, Lai Van
  • Le, Huong Thi Thu
  • Le, Danh Vinh

Abstract

In this paper, we examine the effects of asset liquidity on innovation investments. We show that firms with highly liquid assets tend to invest more in research and development (R&D) and to generate higher numbers of patents and patent citations. These findings hold even after controlling for cash holdings, stock liquidity, and firm characteristics. We hypothesize that the positive effect of asset liquidity on innovation is because this liquidity can help firms reduce the cost of capital. Consistent with this hypothesis, we find that the effect is more pronounced for firms with high cash-flow uncertainty or less capacity to access external equity capital. Overall, our findings show that asset liquidity is an important determinant of innovation.

Suggested Citation

  • Pham, Ly Thi Minh & Vo, Lai Van & Le, Huong Thi Thu & Le, Danh Vinh, 2018. "Asset liquidity and firm innovation," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 225-234.
    • Handle: RePEc:eee:finana:v:58:y:2018:i:c:p:225-234
    DOI: 10.1016/j.irfa.2017.11.005
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    More about this item

    Keywords

    Asset liquidity; Cash flow uncertainty; Cost of capital; Innovation; R&D investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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