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Liquidity and Governance

Author

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  • Kerry Back
  • Tao Li
  • Alexander Ljungqvist

Abstract

Is greater trading liquidity good or bad for corporate governance? We address this question both theoretically and empirically. We solve a model consisting of an optimal IPO followed by a dynamic Kyle market in which the large investor's private information concerns her own plans for taking an active role in governance. We show that an increase in the liquidity of the firm's stock increases the likelihood of the large investor 'taking the Wall Street walk.' Thus, higher liquidity is harmful for governance. Empirical tests using three distinct sources of exogenous variation in liquidity confirm the negative relation between liquidity and blockholder activism.

Suggested Citation

  • Kerry Back & Tao Li & Alexander Ljungqvist, 2013. "Liquidity and Governance," NBER Working Papers 19669, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19669
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. repec:eee:appene:v:211:y:2018:i:c:p:126-135 is not listed on IDEAS

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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