Agency Costs and Strategic Speculation in the U.S. Stock Market
81 Pages Posted: 6 Sep 2015 Last revised: 9 Jul 2019
Date Written: July 4, 2019
This study shows theoretically and empirically that a firm’s agency problems may affect its stock liquidity. We postulate that less uncertainty about suboptimal managerial effort (or investment) may enhance liquidity provision by lowering dealers’ perceived adverse selection risk from trading with better-informed speculators. Consistent with our theory, we find that the staggered adoption of antitakeover provisions across U.S. states in the 1980s and 1990s --- a plausibly exogenous shock reducing perceived effort uncertainty by unambiguously facilitating managerial agency --- improves the stock liquidity of affected firms relative to peer firms, especially at low prior effort cost. This evidence suggests that firm-level agency considerations play a nontrivial role for the process of price formation in financial markets.
Keywords: Corporate Governance, Agency Costs, Liquidity, Strategic Trading, Price Formation, Stock Markets
JEL Classification: D22, G14, G34
Suggested Citation: Suggested Citation