Focus on Fewer but Better Patents when Stock Is Liquid

How do liquid stocks affect the quantity and economic value of patents? Using a quasi-random experiment, we show that liquidity increases the economic value of innovation. These results are mainly driven by innovation-oriented firms, such as science-based firms, software-related firms, and specialized suppliers. We also show that liquid stocks increase the economic value of patents by disciplining and incentivizing managers to focus on economically valuable innovation through intensified institutional monitoring and facilitated information production. A positive effect of stock liquidity on innovation value, combined with a negative effect of stock liquidity on innovation quantity, suggests that liquid stocks encourage managers to trade off the quantity of patents against the economic value of patents when developing innovation strategies.