Stock liquidity, fnancial constraints, and innovation in Chinese SMEs

This study investigates the relationship between stock liquidity and frm innovation for publicly traded growing small and medium-sized enterprises (SMEs) in China using both innovation input and output. We collected samples of 785 SMEs from China's Shenzhen Growth Enterprises Market without the fnancial industry from 2010 to 2020. The empirical fndings demonstrate a signifcant positive relationship between stock liquidity and both innovation input, as measured by R&D investments, and innovation output, as proxied by patenting activities. A series of robustness tests demonstrate the reliability of our results. Increased liquidity enhances SMEs' innovation mainly by alleviating fnancial constraints, whereas the mediating efect of mergers and acquisitions (M&A) is not apparent at the frm level. Furthermore, the inhibitory efect of blockholder ownership on frm innovation is weak. Further analysis reveals that this favorable impact can last for at least four years, with manufacturing SMEs benefting the most. Our study shows that the innovation abilities of SMEs can be enhanced by improving stock liquidity, which is mainly driven by tackling fnancial constraints.