The Effect of Liquidity on Governance
Review of Financial Studies, June 2013, 26(6), 1443-1482.
66 Pages Posted: 4 Aug 2011 Last revised: 23 Oct 2018
Date Written: October 19, 2012
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: Suggested Citation