Abstract: Asset liquidity reflects the liquidity of an enterprise′s assets. What impact does it have on R&D investment? The paper constructs liquidity indicators from two different aspects, and explores the relationship between asset liquidity and corporate innovation with the data of China′s listed firms, finding that a firm′s asset liquidity positively affects its innovation investment, and this effect is larger to the financially-constrained firms; a firm with higher asset liquidity has cashability and hypothecary value, which enhances the funding of the firm′s innovative project by lower financing and transaction costs. The conclusions show that besides the means of offering subsidies and reducing taxes to directly increase the cash flow of firms, government should further improve the asset transaction rules and encourage the market to create new modes for asset transaction. This can increase a firm′s asset liquidity, settle its financing problem, and motivate corporate innovation.

Key words: asset liquidity, innovation, transaction costs, financial constraint