Three essays on Finance and Innovation

Innovation is regarded as a driving force behind national and firm level competitive advantage, which leads to higher future earnings and positive long-term abnormal operating performance. The financial system also plays an essential role in increasing firm and economic growth. The literature supports the notion that better developed financial intermediaries and markets can enhance productivity growth and technological innovation. In this thesis, we consider both micro (firm-level) and macro (country-level) factors and discuss how they affect innovation performance from the perspective of financial literature. We specifically emphasise the influence of two factors based on the empirical research on international samples. The first is stock liquidity. We provide a deep understanding of these factors by exploring how it affects innovation outputs and what impact it has on innovation performance. We find that although stock liquidity can affect firm innovation through R&D investment, the most impact on firm innovation comes from the direct impact of stock liquidity itself. Besides, while increased stock liquidity improves a firm’s innovation performance, it mainly contributes to a firm’s efficiency in producing high-quality patents rather than more patents. The second is the pandemic shocks. We demonstrate that following a pandemic, innovation output is disrupted for approximately seven years. In addition, the main result of the effect of pandemic shocks on aggregate innovation output is driven mainly by a significant reduction in innovative activity in the Information and Communication technology sector. Overall, we show that financial systems could improve innovation performance by boosting its efficiency, such as increasing stock liquidity. It could also affect innovation activities as a channel of exogenous shocks.