Does Stock Liquidity Affect the Incentives to Monitor: Evidence from Corporate Takeovers
Review of Financial Studies, forthcoming
65 Pages Posted: 13 Mar 2014
Date Written: September 13, 2013
We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of private, but not for takeovers of public targets. The negative relation between liquidity and acquirer gains is stronger when the threat of disciplinary trading (exit) by institutions is weaker and acquirers have higher agency costs. Acquirers of private targets with lower stock liquidity are more likely to withdraw deals, experience higher involuntary CEO turnover following value-destroying acquisitions, and pay lower premiums. Our results support the hypothesis that stock liquidity weakens institutions’ incentives to monitor management decisions, except in those cases where the disciplining effect of the threat of exit may be particularly high.
Keywords: takeovers, institutional ownership, liquidity, corporate governance
JEL Classification: G32, G34
Suggested Citation: Suggested Citation