Liquidity and Governance

51 Pages Posted: 6 Nov 2013 Last revised: 3 Jun 2015

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Tao Li

City University of Hong Kong (CityU) - Department of Economics & Finance

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

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Date Written: May 27, 2015

Abstract

We solve a dynamic Kyle model in which the large investor’s private information concerns her plans for taking an active role in governance. We show that once a block has been created, its continued existence is jeopardized by an increase in the liquidity of the firm’s stock. Greater liquidity increases the likelihood of the large investor selling her block instead of intervening. Thus, blocks are inherently fragile and higher liquidity can be harmful for governance. Empirical tests using three distinct sources of exogenous variation in liquidity and four proxies for blockholder activism confirm that greater liquidity is harmful on average.

Keywords: Liquidity, corporate governance, shareholder activism, hedge funds, shareholder proposals, Wall Street walk, Kyle models

JEL Classification: G34, G23

Suggested Citation

Back, Kerry and Li, Tao and Ljungqvist, Alexander and Ljungqvist, Alexander, Liquidity and Governance (May 27, 2015). ECGI - Finance Working Paper No. 388, Available at SSRN: https://ssrn.com/abstract=2350362 or http://dx.doi.org/10.2139/ssrn.2350362

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Tao Li

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

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

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