Asset liquidity and firm innovation

• Published in: International review of financial analysis 2018-07, Vol.58, p.225-234
• Main Authors: Pham, Ly Thi Minh, Vo, Lai Van, Le, Huong Thi Thu, Le, Danh Vinh
• Format: Article
• Language: English
• Subjects: Asset liquidity; Cash flow uncertainty; Cost of capital; Innovation; R&D investment
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2017.11.005

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. •Firms with highly liquid assets tend to invest more in R&D and to generate higher numbers of patents and patent citations.•The effect of asset liquidity on innovation is more pronounced for firms with high cash-flow uncertainty.•The effect of asset liquidity on innovation is also stronger for firms with less capacity to access external equity capital.•Low cost of capital associated with high asset liquidity is the main driver of the positive effect of asset liquidity on innovation.