Liquidity and Shareholder Activism

Abstract

This paper documents that stock liquidity improves shareholders' incentive to monitor management. Using a hand-collected sample of contested proxy solicitations and shareholder proposals as occurrences of shareholder activism, we find that poor firm performance increases the probability of shareholder activism and that this relationship is much stronger for firms with liquid stock than for other firms. The conclusion that liquidity improves monitoring is robust to different measures of firm performance and liquidity. We also document that target shareholders earn positive abnormal returns on the announcement date of activism and conclude that shareholder activism creates shareholder value.

Liquidity and Governance

“…These findings suggest that for the average stock market-listed firm in the U.S., greater trading liquidity is harmful for governance, in the sense of discouraging large shareholders from engaging in the governance of the firm. They stand in contrast to prior empirical work that treats the level of a firm's trading liquidity as exogenous (for example, Norli et al (2010)) or that uses decimalization as a shock to liquidity. A potential explanation for the difference in results is that decimalization, which undoubtedly improved some aspects of liquidity, coincided with some other aggregate shock that independently improved governance (such as Regulation Fair Disclosure).…”

Price Pressure of Trading and Equity Prices in Hedge Fund Activism

“…Third, my article contributes to the literature on stock liquidity and, specifically, its effects on corporate governance. Norli, Ostergaard, and Schindele () and Mihov () show that the probability of hedge‐fund activism increases in a company's stock liquidity, arguing that liquidity provides a camouflage and allows activists to hide their trades and profit from informed trading. Edmans, Fang, and Zur () similarly document that hedge funds target high‐liquidity firms, but they focus on a channel in which liquidity promotes effective corporate governance by enabling a credible threat of exit.…”

“…Furthermore, recent studies show that hedge funds take into account and strategically try to minimize the expected price effects of their trading. Norli, Ostergaard, and Schindele () and Mihov () find that stock liquidity increases the probability of activism and that activists accumulate more ownership in firms with liquid stock. Gantchev and Jotikasthira () provide evidence that institutional selling of stocks raises firms’ probabilities of becoming activist targets by providing camouflage for the activists’ ownership block formations.…”

“…Several recent empirical studies examine the strategic implications of company liquidity for hedge‐fund activism. Norli, Ostergaard, and Schindele () and Mihov () show that liquidity increases the probability of activism. These studies also show that conditional on engaging companies, activists tend to accumulate higher ownership in more liquid targets.…”

Stock Liquidity and Firm Value: Evidence from a Policy Experiment in India

“…Agency based (Admati and Pfleiderer ; Edmans, ; Bharath et al ; Edmans et al ; Maug ; Norli et al ), Information based—positive feedback effect (Subrahmanyam and Titman ; Khanna and Sonti ); Pricing based (Holmstrom and Tirole, ); and Perception (behavioral) based (Baker and Stein )…”