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The Effect of Liquidity on GovernanceAlex EdmansLondon Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) Vivian W. FangUniversity of Minnesota - Twin Cities - Department of Accounting Emanuel ZurCity University of New York - Baruch College October 19, 2012 ECGI - Finance Working Paper No. 319/2011 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.
Number of Pages in PDF File: 60 Keywords: Stock Liquidity, Corporate Governance, Hedge Fund Activism, Blockholders, Exit, Voice JEL Classification: G12, G19, G23, G34, G38 working papers seriesDate posted: August 4, 2011 ; Last revised: October 21, 2012Suggested CitationContact Information
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