Market Sentiment and Innovation Activities

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.

Strategic leadership and technological innovation: A comprehensive review and research agenda

“…Finally, some articles do not explicitly adopt a theoretical lens and put little emphasis on extant theory. Many of those studies stem from the fields of finance and economics (e.g., Chen, Podolski, Rhee, & Veeraraghavan, 2014;Dang & Xu, 2018;Frydman & Papanikolaou, 2018). The most likely explanation for this observation is differences in academic conventions across fields.…”

The Effects of Mandatory Pollution Abatement on Corporate Investment and Performance: Theory and Evidence from a U.S. Regulation

“…Gan Michenaud and Weston, 2015). Dang and Xu (2018) show that market sentiment has different effects on R&D investments of financially constrained firms and unconstrained firms. They show that financially constrained firms invest more in R&D when market sentiment is high while unconstrained firms' investment is not responsive.…”

Bank Lending and Corporate Innovation: Evidence from SFAS 166/167*

“…Brown et al (2013) find that the development of stock markets and credit markets has differential impacts on R&D and fixed-asset investments. Market sentiment, stock liquidity, short selling, and financial analysts are also found to affect capital expenditures and innovation differently (Becker-Blease and Paul 2006;Fang et al 2009;Benner and Ranganathan 2012;Derrien and Kecskes 2013;Tian 2013, 2014;Fang et al 2014;Grullon et al 2015;Dang and Xu 2018). Cornaggia et al (2015) find evidence suggesting that deregulation indirectly reduces public firms' innovation by reducing the supply of innovative private target firms, which arguably gain greater access to credit after the deregulation.…”