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Market Sentiment and Innovation Activities

Published online by Cambridge University Press:  10 April 2018

Tri Vi Dang  and
Zhaoxia Xu
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 3 , June 2018 , pp. 1135 - 1161
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank an anonymous referee, Viral Acharya, Soku Byoun, Gary Gorton, Paul Malatesta (the editor), Bernard Salanie, Robert Shiller, Harald Uhlig, and participants at the 2013 Applied Economics Workshop at Columbia University and the 2014 Tsinghua University Finance Workshop for very helpful comments.

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