Liquidity and Large Shareholder Monitoring

54 Pages Posted: 2 Jan 2019

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Yongxin Xu

Monash University; Monash University

Jian Xue

Tsinghua University - School of Economics & Management

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: November 29, 2018

Abstract

Permanent or long-term large shareholders have different governance incentives and mechanisms from institutional investors. Liquidity could facilitate either cutting and running by large shareholders or, alternatively, increased monitoring. Using an exogenous shock to liquidity in China, we document evidence of no cutting and running. We find that board members representing large shareholders become less busy and more diligent, while busyness and diligence of independent directors are not affected by liquidity. Large shareholders also improve compensation contracts by increasing pay-performance sensitivity. These effects are more pronounced when gains from monitoring are higher or monitoring is less susceptible to the free-rider problem.

Keywords: large shareholders; liquidity; corporate governance; split-share structure reform; board of directors; executive compensation

JEL Classification: G32; G34; G38

Suggested Citation

John, Kose and Xu, Yongxin and Xue, Jian and Zhuang, Zili, Liquidity and Large Shareholder Monitoring (November 29, 2018). Available at SSRN: https://ssrn.com/abstract=3292786 or http://dx.doi.org/10.2139/ssrn.3292786

Kose John

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Yongxin Xu

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University ( email )

Jian Xue

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Zili Zhuang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin N.T.
Hong Kong

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