Effect of stock liquidity on the economic value of patents: Evidence from US patent data

Exploiting the Russell index reconstitutions as an exogenous shock, we show that an increase in stock liquidity is associated with an increase in the economic value of innovation. We also show that liquid stocks result in improved information production and institutional monitoring, which facilitate feedback effects and instill discipline in managers to prioritize economically valuable innovation. A positive effect of stock liquidity on innovation value, together with a negative effect of stock liquidity on innovation quantity, suggests that liquid stocks present managers with a tradeoff between the quantity of innovation and its value to maximize firm value.