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.