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The Effect of Liquidity on Governance

  • Alex Edmans
  • Vivian W. Fang
  • Emanuel Zur

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. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 26 (2013)
Issue (Month): 6 ()
Pages: 1443-1482

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Handle: RePEc:oup:rfinst:v:26:y:2013:i:6:p:1443-1482
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  1. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
  2. Anat R. Admati & Paul Pfleiderer, 2009. "The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2445-2485, July.
  3. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
  4. Vivian W. Fang & Xuan Tian & Sheri Tice, 2014. "Does Stock Liquidity Enhance or Impede Firm Innovation?," Journal of Finance, American Finance Association, vol. 69(5), pages 2085-2125, October.
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  7. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 107-155, February.
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  9. Guercio, Diane Del & Hawkins, Jennifer, 1999. "The motivation and impact of pension fund activism," Journal of Financial Economics, Elsevier, vol. 52(3), pages 293-340, June.
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  11. Denis Gromb, 2000. "Public Trading and Private Incentives," FMG Discussion Papers dp347, Financial Markets Group.
  12. Heflin, Frank & Shaw, Kenneth W., 2000. "Blockholder Ownership and Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 621-633, December.
  13. Marco Becht & Julian Franks & Colin Mayer & Stefano Rossi, 2009. "Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3093-3129, August.
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  25. William C. Gerken, 2014. "Blockholder Ownership and Corporate Control: The Role of Liquidity," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1450003-1-1.
  26. Greenwood, Robin & Schor, Michael, 2009. "Investor activism and takeovers," Journal of Financial Economics, Elsevier, vol. 92(3), pages 362-375, June.
  27. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
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  30. Fang, Vivian W. & Noe, Thomas H. & Tice, Sheri, 2009. "Stock market liquidity and firm value," Journal of Financial Economics, Elsevier, vol. 94(1), pages 150-169, October.
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  34. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
  35. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
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