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The effect of liquidity on governance

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2013 Vol 26:6 p 1443-1482

Authors / Editors

Edmans A;Fang VW;Zur E

Biographies

Alex Edmans

Publication Year

2013

Abstract

This paper demonstrates a positive effect of stock liquidity on blockholder governance. Liquidity increases the likelihood of block formation. Conditional upon acquiring a stake, liquidity reduces the likelihood that the blockholder governs through voice (intervention)—as shown by the lower propensity for active investment (filing Schedule 13D) than passive investment (filing Schedule 13G). The lower frequency of activism does not reflect the abandonment of governance, but governance through the alternative channel of exit (selling one's shares): A 13G filing leads to positive announcement returns and improvements in operating performance, especially in liquid firms. Moreover, taking into account the increase in block formation, liquidity has an unconditional positive effect on voice as well as exit. We use decimalization as an exogenous shock to liquidity to identify causal effects.

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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