Vivian Fang (Rutgers University) presenting 'Does Stock Liquidity Enhance or Impede Firm Innovation?' - Abstract: There has been much debate about whether stock liquidity enhances or impedes firm innovation. Some fear that high stock liquidity hinders firms’ long-run investment in innovation by making managers myopic. Others believe that high stock liquidity makes stock prices more efficient which mitigates managerial myopia and enhances firm innovation. We document a negative relationship between stock liquidity and firm innovation productivity. This relationship is more pronounced when management is less entrenched or when firm profits are low. Both are consistent with high transaction costs insulating managers from pressures to maximize shortterm profits (or stock price). To establish causality we show the negative relationship holds following an exogenous shock to liquidity (decimalization). We next examine the role of institutional investors. We find that an exogenous increase in liquidity (decimalization) leads to a higher level of institutional ownership by transient and quasi-indexers which reduces innovation. Increases in dedicated institutional ownership are not correlated with an exogenous increase in liquidity but are positively associated with innovation. Our findings suggest that institutional investors who gather private information enhance innovation while transient and quasi-indexer institutional investors impede innovation.