Working Paper

Innovation, investor sentiment, and firm-level experimentation

Abstract: 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;

JEL Classification: G02; G31; O32; O33; O40;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2015-08-12

Number: 2015-67

Pages: 46 pages