Agency Costs and Strategic Speculation in the U.S. Stock Market

81 Pages Posted: 6 Sep 2015 Last revised: 25 Jan 2022

See all articles by Paolo Pasquariello

Paolo Pasquariello

University of Michigan, Stephen M. Ross School of Business

Date Written: January 24, 2022

Abstract

This study investigates the notion that agency-driven information asymmetry about a firm may affect its stock liquidity. I postulate that less uncertainty about managerial agency problems may enhance liquidity provision --- by lowering dealers' perceived adverse selection risk from trading with better-informed speculators. Consistent with my conjecture, I find that the staggered adoption of antitakeover provisions across U.S. states in the 1980s and 1990s --- a plausibly exogenous shock unambiguously reducing the threat of (and speculators' information advantage about) value-enhancing intervention --- robustly improves the stock liquidity of affected firms relative to peer firms, especially at prior high fundamental or agency uncertainty and poor governance.

Keywords: Corporate Governance; Agency Costs; Takeover Threat; Investor Activism; Liquidity; Strategic Trading; Price Formation; Stock Markets

JEL Classification: D22, G14, G34

Suggested Citation

Pasquariello, Paolo, Agency Costs and Strategic Speculation in the U.S. Stock Market (January 24, 2022). Ross School of Business Paper No. 1284, Available at SSRN: https://ssrn.com/abstract=2655611 or http://dx.doi.org/10.2139/ssrn.2655611

Paolo Pasquariello (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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