Working Paper: CEPR ID: DP9739
Authors: 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.
Keywords: corporate governance; hedge funds; Kyle models; liquidity; shareholder activism; shareholder proposals; Wall Street walk
JEL Codes: G23; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity (E41) | Blockholder Activism (G34) |
| Brokerage Closures (G24) | Liquidity (E41) |
| Market Maker Closures (G10) | Liquidity (E41) |
| Retail Brokerage Mergers (G24) | Liquidity (E41) |
| Liquidity (E41) | Shareholder Proposals (G34) |