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Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers

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  • Peter Roosenboom
  • Frederik P. Schlingemann
  • Manuel Vasconcelos

Abstract

We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of private targets, but not for takeovers of public targets. The negative relation between liquidity and acquirer gains is stronger when the threat of disciplinary trading (exit) by institutions is weaker and acquirers have higher agency costs. Acquirers of private targets with lower stock liquidity are more likely to withdraw deals and experience higher involuntary CEO turnover following value-destroying acquisitions. Our results support the hypothesis that stock liquidity weakens institutions' incentives to monitor management decisions, except in those cases where the disciplining effect of the threat of exit may be particularly high.

Suggested Citation

  • Peter Roosenboom & Frederik P. Schlingemann & Manuel Vasconcelos, 2014. "Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2392-2433.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:8:p:2392-2433.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht076
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    Cited by:

    1. Chen, An-Sing & Chu, Hsiang-Hui & Hung, Pi-Hsia & Cheng, Miao-Sih, 2020. "Financial risk and acquirers' stockholder wealth in mergers and acquisitions," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Pombo, Carlos & Taborda, Rodrigo, 2017. "Stock liquidity and second blockholder as drivers of corporate value: Evidence from Latin America," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 214-234.
    3. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    4. Huang, Ying Sophie & Guo, Feng & Ma, Lina, 2023. "Do M&A funds create value in Chinese listed firms?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    5. Bibo Liu & Xuan Tian, 2022. "Do Venture Capital Investors Learn from Public Markets?," Management Science, INFORMS, vol. 68(10), pages 7274-7297, October.
    6. Wei Zhang & Yi Li, 2023. "Liquidity risk and expected cryptocurrency returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 472-492, January.
    7. David Yermack, 2017. "Corporate Governance and Blockchains," Review of Finance, European Finance Association, vol. 21(1), pages 7-31.
    8. Chang, Eric C. & Lin, Tse-Chun & Ma, Xiaorong, 2020. "Governance through trading on acquisitions of public firms," Journal of Corporate Finance, Elsevier, vol. 65(C).
    9. Ole-Kristian Hope & Han Wu & Wuyang Zhao, 2017. "Blockholder exit threats in the presence of private benefits of control," Review of Accounting Studies, Springer, vol. 22(2), pages 873-902, June.
    10. Nadarajah, Sivathaasan & Duong, Huu Nhan & Ali, Searat & Liu, Benjamin & Huang, Allen, 2021. "Stock liquidity and default risk around the world," Journal of Financial Markets, Elsevier, vol. 55(C).
    11. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    12. Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.
    13. Liang Tang & Zhen Gu & Qi Zhang & Jiali Liu, 2022. "RETRACTED ARTICLE: The effect of firm size, industry type and ownership structure on the relationship between firms' sustainable innovation capability and stock liquidity," Operations Management Research, Springer, vol. 15(3), pages 825-837, December.
    14. Wang, Kai & Li, Tingting & San, Ziyao & Gao, Hao, 2023. "How does corporate ESG performance affect stock liquidity? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    15. Field, Laura Casares & Mkrtchyan, Anahit & Wang, Yuan, 2022. "Bond liquidity and investment," Journal of Banking & Finance, Elsevier, vol. 145(C).
    16. Szu-Yin (Jennifer) Wu & Kee H. Chung, 2022. "Hedge Fund Activism and Corporate M&A Decisions," Management Science, INFORMS, vol. 68(2), pages 1378-1403, February.
    17. Simon Döring & Wolfgang Drobetz & Sadok El Ghoul & Omrane Guedhami & Henning Schröder, 2021. "Institutional investment horizons and firm valuation around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(2), pages 212-244, March.
    18. Gu, Ming & Li, Dongxu & Ni, Xiaoran, 2022. "Too much to learn? The (un)intended consequences of RegTech development on mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 76(C).
    19. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Liquidity and firm value in an emerging market: Nonlinearity, political connections and corporate ownership," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    20. Benson, Karen & Faff, Robert & Smith, Tom, 2015. "Injecting liquidity into liquidity research," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 533-540.
    21. Chatterjee, Sris & Hasan, Iftekhar & John, Kose & Yan, An, 2021. "Stock liquidity, empire building, and valuation," Journal of Corporate Finance, Elsevier, vol. 70(C).

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