Firm-level R&D After Periods of Intense Technological Innovation : The Role of Investor Sentiment

Following periods of intense technological innovation, R&D is a critical driver of technology diffusion, but it is subject to frictions that can slow down the diffusion process. Building on the literature that documents the real effects of investor sentiment, we study whether sentiment strengthens the link between aggregate innovation and firm-level R&D for companies affected by these frictions. We find a positive answer for low-tech firms, especially those subject to informational externalities and whose equity is held by short-termist investors. In contrast to the literature on sentiment and capital expenditures, the effect is weaker for financially-constrained firms. These firms have lower R&D intensity than their unconstrained counterparts