Can innovation help existing firms resist shock from new stock issuance? Evidence from the launch of China’s STAR market

The launch of China’s STAR market (officially known as the Science and Technology Innovation Board of Shanghai Stock Exchange) caused a significant drop in stock prices in existing stock markets in the Shanghai and Shenzhen stock exchanges. This study examines whether innovative firms showed more resilience to the shock caused by the launch of the STAR market. Using a sample of Chinese A-share listed firms, we find that firms with higher innovation had significantly higher stock returns during the shock period. This suggests that the STAR market launch induced investors to pay more attention to firm innovation and prompted them to reward innovations to a greater extent. This finding remains intact after an array of robustness tests. Moreover, this effect was more pronounced in non-state-owned enterprises and firms with higher product market competition. Additional analyses suggest that investors prefer firms with higher quality of innovation. Overall, this study finds that innovation plays an important role in capital markets; that is, innovation helps firms resist shock from the issuance of new shares.