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The Effect of Liquidity on Governance

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

ECGI - Finance Working Paper No. 319/2011

60 Pages Posted: 4 Aug 2011 Last revised: 5 Dec 2013

Alex Edmans

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

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

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. ; 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 ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

Emanuel Zur

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

College Park, MD 20742-1815
United States

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