The Effect of Liquidity on Governance

The Effect of Liquidity on Governance

Alex Edmans, Vivian W. Fang, Emanuel Zur

Series number :

Serial Number: 

Date posted :

October 01 2011

Last revised :

October 22 2018
SSRN Share


  • Stock Liquidity • 
  • Corporate governance • 
  • Hedge Fund Activism • 
  • Blockholders • 
  • exit • 
  • voice

This paper studies the effect of stock liquidity on blockholder governance. Conditional upon acquiring a stake, liquidity reduces the likelihood that a blockholder governs through voice (intervention) – as shown by the greater propensity to file Schedule 13Gs (passive investment) than 13Ds (active investment).

The lower frequency of activism does not reflect the abandonment of governance, but governance through the alternative channel of exit (trading): a 13G filing leads to positive announcement returns and improvements in operating performance, especially in liquid firms. Moreover, liquidity increases the likelihood of block formation to begin with. Taking this into account, liquidity leads to an overall increase in both voice and exit, and is thus beneficial for governance. We use decimalization as an exogenous shock to liquidity to identify causal effects.

Published in

Published in: 
Publication Title: 
Review of Financial Studies
Vol. 26(6), 1443-1482, June 2013


Real name:
Vivian W. Fang
Real name:
Emanuel Zur