The Effect of Liquidity on Governance

Review of Financial Studies, June 2013, 26(6), 1443-1482.

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 319/2011

66 Pages Posted: 4 Aug 2011 Last revised: 23 Oct 2018

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Vivian W. Fang

European Corporate Governance Institute (ECGI); Indiana University

Emanuel Zur

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2012

Abstract

This paper studies the effect of stock liquidity on blockholder governance. Conditional upon acquiring a stake, liquidity reduces the likelihood that a blockholder governs through voice (intervention) – as shown by the greater propensity to file Schedule 13Gs (passive investment) than 13Ds (active investment). The lower frequency of activism does not reflect the abandonment of governance, but governance through the alternative channel of exit (trading): a 13G filing leads to positive announcement returns and improvements in operating performance, especially in liquid firms. Moreover, liquidity increases the likelihood of block formation to begin with. Taking this into account, liquidity leads to an overall increase in both voice and exit, and is thus beneficial for governance. We use decimalization as an exogenous shock to liquidity to identify causal effects.

Keywords: Stock Liquidity, Corporate Governance, Hedge Fund Activism, Blockholders, Exit, Voice

JEL Classification: G12, G19, G23, G34, G38

Suggested Citation

Edmans, Alex and Fang, Vivian W. and Zur, Emanuel, The Effect of Liquidity on Governance (October 19, 2012). Review of Financial Studies, June 2013, 26(6), 1443-1482. , European Corporate Governance Institute (ECGI) - Finance Working Paper No. 319/2011, Available at SSRN: https://ssrn.com/abstract=1905224 or http://dx.doi.org/10.2139/ssrn.1905224

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Vivian W. Fang

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Indiana University ( email )

Bloomington, IN 47405
United States
47405 (Fax)

Emanuel Zur

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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