The Effect of Liquidity on Governance
London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
Vivian W. Fang
University of Minnesota - Twin Cities - Department of Accounting
University of Maryland - Robert H. Smith School of Business
October 19, 2012
Review of Financial Studies, June 2013, 26(6), 1443-1482.
ECGI - Finance Working Paper No. 319/2011
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, G38Accepted Paper Series
Date posted: August 4, 2011 ; Last revised: December 5, 2013
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