Liquidity and Governance
51 Pages Posted: 6 Nov 2013 Last revised: 3 Jun 2015
Date Written: May 27, 2015
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: Suggested Citation