Lower nominal stock prices tend to attract more speculative trading, causing higher price volatility, which may force managers of publically listed firms to excessively focus on short-term earnings at the expense of R&D. We hypothesize that firms investing more in R&D prefer to set higher share prices to mitigate investor short-termism and foster innovation. Consistent with this hypothesis, we find that firms with high R&D capital (1) choose higher share prices at their initial listing, and (2) are subsequently less likely to engage in stock splits to bring down their share prices. Justifying these price management actions, we find that high share prices are negatively associated with proxies of investor myopia. We also show that high share prices are positively associated with future productivity of innovation, after controlling for a host of other factors. Our results suggest that managers of publicly listed firms use nominal share price as a tool to enhance innovation.

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Zayed University

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Author First name, Last name, Institution

Huong LE
Ji-Chai LIN
G. Mujtaba MIAN