We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation. This topic is of interest because innovation is crucial for firm‐ and national‐level competitiveness and stock liquidity can be altered by financial market regulations. Using a difference‐in‐differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation. We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor.

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We examine capital expenditure decisions of discount firms in response to WalMart's entry into their markets. Before Wal-Mart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After Wal-Mart's entry, diversified firms are quicker to either "exit" the discount business or "stay and fight." Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.

We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation. This topic is of interest because innovation is crucial for firm-and national-level competitiveness and stock liquidity can be altered by financial market regulations. Using a difference-indifferences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation. We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor.

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Prior work has identified binding credit constraints during recessions. We assess whether corporate diversification alleviates these constraints. We use relative-to-industry growth in sales and growth in inventories as measures of a firm's ability to fund its activities. We find that during recessions, industry-adjusted sales growth rates drop more for bank-dependent focused firms than for bankdependent diversified firms. This result holds after controlling for endogeneity of the diversification decision and survivorship bias. We find that inventory growth rates drop more for bank-dependent focused firms than for bank-dependent diversified firms during recessions even after controlling for contemporaneous growth in sales. Consistent with a credit constraint explanation, we document a larger drop in net debt issuances for bank-dependent focused firms during recessions. Overall, bankdependent diversified firms appear less credit constrained during recessions and consequently exhibit less cyclical behavior than bank-dependent focused firms.

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