Ownership Structure, Liquidity Demand, and Shareholder Monitoring

Posted: 16 May 1998

See all articles by Charles M. Kahn

Charles M. Kahn

University of Illinois, Urbana-Champaign; Feseral Reserve Bank of Saint Louis; Bank of Canada

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Abstract

Major shareholders can choose between undertaking costly actions that improve firm value ("monitoring") and trading on private information. If investors face some chance of liquidity needs, share prices do not fully reveal how much monitoring occurs; thus, higher liquidity demand makes selling out more attractive than monitoring, decreasing monitoring and firm value. Higher liquidity demand also increases a major shareholder's incentive to gather additional costly information for use in trading; since informed trading is zero sum, this further decreases overall social welfare. Increasing the large shareholder's stake in the firm may not reduce this problem if the benefit/cost ratio for gathering speculative information exceeds that for monitoring. If other large investors can also gather speculative information, the major shareholder's gains from informed trading decrease, making monitoring more attractive. Nevertheless, such additional speculative activity is costly, offsetting its positive impact on monitoring. We discuss the implications of these results for the choice of ownership structure and market liquidity across firms, industries, and financial systems.

JEL Classification: G32, G10

Suggested Citation

Kahn, Charles M. and Winton, Andrew, Ownership Structure, Liquidity Demand, and Shareholder Monitoring. Available at SSRN: https://ssrn.com/abstract=6764

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Andrew Winton (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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