Does Stock Liquidity Affect the Incentives to Monitor: Evidence from Corporate Takeovers

Review of Financial Studies, forthcoming

65 Pages Posted: 13 Mar 2014

See all articles by Peter Roosenboom

Peter Roosenboom

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Manuel Vasconcelos

Cornerstone Research - New York Office

Date Written: September 13, 2013

Abstract

We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of private, but not for takeovers of public targets. The negative relation between liquidity and acquirer gains is stronger when the threat of disciplinary trading (exit) by institutions is weaker and acquirers have higher agency costs. Acquirers of private targets with lower stock liquidity are more likely to withdraw deals, experience higher involuntary CEO turnover following value-destroying acquisitions, and pay lower premiums. Our results support the hypothesis that stock liquidity weakens institutions’ incentives to monitor management decisions, except in those cases where the disciplining effect of the threat of exit may be particularly high.

Keywords: takeovers, institutional ownership, liquidity, corporate governance

JEL Classification: G32, G34

Suggested Citation

Roosenboom, Peter and Schlingemann, Frederik Paul and Vasconcelos, Manuel, Does Stock Liquidity Affect the Incentives to Monitor: Evidence from Corporate Takeovers (September 13, 2013). Review of Financial Studies, forthcoming. Available at SSRN: https://ssrn.com/abstract=2061600 or http://dx.doi.org/10.2139/ssrn.2061600

Peter Roosenboom

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T09-56
3000 DR Rotterdam
Netherlands
+31 10 40 82255 (Phone)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Frederik Paul Schlingemann

University of Pittsburgh - Finance Group ( email )

368A Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Manuel Vasconcelos (Contact Author)

Cornerstone Research - New York Office ( email )

1919 Pennsylvania Avenue
Suite 600
Washington, DC 20006
United States

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