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.

Thirty years of shareholder activism: A survey of empirical research

“…Norli, Ostergaard, and Schindele (2015) find that the likelihood of activism is positively related to the target firm's share liquidity, presumably because liquidity facilitates the pre-activism accumulation of shares and allows the activist to capture more of the gain from activism. Edmans, Fang, and Zur (2013) agree on the overall effect of liquidity, but note that, given a large stake, higher liquidity discourages blockholders to engage in activist efforts because it lowers the cost of simply selling their shares.…”

“…For example, Norli et al (2015) argue that activism is facilitated by share liquidity, and Kahn and Winton (1998) argue that activism will not occur when the activist believes that the target firm's shares are overvalued.…”

Does Stock Liquidity Affect Accrual‐based Earnings Management?

“…Increased liquidity leads to greater direct monitoring as it allows investors to purchase larger blocks of shares at more favorable prices and incentivizes investors to actively monitor these investments (Maug, 1998). 6 This perspective is supported by Norli et al (2015) who find that liquidity leads to more frequently contested proxy solicitations and shareholder proposals. Liquidity can also lead to greater indirect monitoring by increasing the threat of investor exit since lower transaction costs make investors more willing to sell more liquid shares in the event that managerial opportunism is detected (Edmans, 2009;Bharath et al, 2013).…”

Not all threats are taken equally: Evidence from proxy fights

“…Thus, the variation of institutional ownership can make activist engagement and success more likely at some firms than others. Further, greater stock liquidity (Amihud Illiquidity Measure) reduces the cost for dissidents to accumulate stakes (Bolton & von Thadden, 1998;Fos, 2017;Kyle & Vila, 1991;Maug, 1998;Norli, Ostergaard, & Schindele, 2015) and therefore increases the likelihood for dissidents to launch proxy fights. Also, DeAngelo (1988), Duvall and Austin (1965), and Bebchuk et al (2017) find that stock market performance (e.g., Excess…”