Liquidity and Governance

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

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics

Tao Li

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

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 3 versions of this paper

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, 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 - Jones Graduate School of Business and Department of Economics ( email )

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

Tao Li

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

83 Tat Chee Avenue
Kowloon
Hong Kong

Alexander Ljungqvist (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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