Stock liquidity, financial constraints, and innovation in Chinese SMEs

Abstract

This study investigates the relationship between stock liquidity and firm innovation for publicly traded growing small and medium-sized enterprises (SMEs) in China using both innovation input and output. We collected samples of 785 SMEs from China’s Shenzhen Growth Enterprises Market without the financial industry from 2010 to 2020. The empirical findings demonstrate a significant positive relationship between stock liquidity and both innovation input, as measured by R&D investments, and innovation output, as proxied by patenting activities. A series of robustness tests demonstrate the reliability of our results. Increased liquidity enhances SMEs' innovation mainly by alleviating financial constraints, whereas the mediating effect of mergers and acquisitions (M&A) is not apparent at the firm level. Furthermore, the inhibitory effect of blockholder ownership on firm innovation is weak. Further analysis reveals that this favorable impact can last for at least four years, with manufacturing SMEs benefiting the most. Our study shows that the innovation abilities of SMEs can be enhanced by improving stock liquidity, which is mainly driven by tackling financial constraints.