Finance and Economics Discussion Series (FEDS)
Innovation, investor sentiment, and firm-level experimentation
Due to frictions like informational externalities, firms invest too little in learning the productivity of newly available technologies through small-scale experimentation. I study the effect of investor sentiment on the relation between technological innovation and future firm-level R&D expenses, which include the resources used for small-scale experimentation. I find that rapidly improving investor sentiment strengthens the effect of technological innovation on one-year-ahead R&D expenses, and that the effect is more pronounced for high-tech firms with tighter financing constraints. The results are not driven by sentiment proxying for technological innovation or by sentiment and R&D expenses being jointly determined. The evidence is consistent with the hypothesis that sentiment counteracts frictions in the process of technology diffusion.
Keywords: Investor sentiment, R&D, Technological innovation
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