Liquidity and Governance

Alexander Ljungqvist (), Kerry Back and Tao Li

No 9739, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Corporate governance; Hedge funds; Kyle models; Liquidity; Shareholder activism; Shareholder proposals; Wall street walk (search for similar items in EconPapers)
JEL-codes: G23 G34 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (4)

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Working Paper: Liquidity and Governance (2013)
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