Blockholder Ownership and Corporate Control: The Role of Liquidity

Abstract

Employing an instrumental variable approach based on the regulatory change of tick sizes, I examine the link between the liquidity of a firm's equity and activism by large shareholders. I find that liquidity increases the likelihood of block formation. Blockholders of more liquid securities take smaller stakes that do not precommit them to monitor. I find evidence that the threat of exit from a block can discipline managers and that this threat is more effective when liquidity is higher. While liquidity increases exit from existing blocks, I find no evidence that share illiquidity forces blockholders to actively monitor.

Keywords: Blockholder, Liquidity , Corporate Governance, Activism

JEL Classification: G34