Doctor of Philosophy (PhD)


Finance (Business Administration)

Document Type



In this dissertation, I explore the underlying mechanisms through which a firm innovates and invests in Research and Development (R&D). It consists of two essays. The initial essay investigates the effects of aggregate stock market liquidity on innovation at both the aggregate and firm levels for publicly traded firms in the U.S., and shows a significant and positive effect at both levels of aggregation. Next, the essay provides two underlying mechanisms through which aggregate stock liquidity enhances innovation. First, high stock market liquidity reduces the cost of raising external capital, making it easier for firms, especially for small firms and those with R&D investments, to issue equity and finance their innovations. Second, high stock market liquidity generates high firm valuation and reduces transaction costs, motivating large firms to buy the innovations of small firms through merger and acquisition activities. Overall, this essay documents that aggregate stock market liquidity plays a very important and positive role in enhancing aggregate innovation. The second essay examines how a firm makes investment decisions under uncertainty. Real option theory predicts an inverse relationship between corporate investment and uncertainty, because investment is (at least partially) irreversible and uncertainty increases the value of the option to wait. In contrast, the strategic growth option framework shows that uncertainty may encourage investment in growth options since the value of the option to wait is drastically eroded due to competition and an initial investment can confer greater capacity to take advantage of future growth opportunities. Consistent with the strategic growth option analysis, this essay documents that firms will invest more in R&D when facing high uncertainty. The reason is that R&D investments can potentially generate growth opportunities which enhance competitive advantages for firms in the future. The study further shows that the switch of more R&D investments and less capital expenditures is more pronounced for firms with fewer real options, i.e., firms that are large, less innovative, or firms in more competitive industries. Finally, this essay documents that these strategic advantages are important factors to derive the investment policies of firms operating in an uncertain environment.



Document Availability at the Time of Submission

Release the entire work immediately for access worldwide.

Committee Chair

Lin, Ji-Chai