Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?
Article first published online: 17 DEC 2002
The American Finance Association 1998
The Journal of Finance
Volume 53, Issue 1, pages 65–98, February 1998
How to Cite
Maug, E. (1998), Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?. The Journal of Finance, 53: 65–98. doi: 10.1111/0022-1082.35053
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Cited By
This paper analyzes the incentives of large shareholders to monitor public corporations. We investigate the hypothesis that a liquid stock market reduces large shareholders' incentives to monitor because it allows them to sell their stocks more easily. Even though this is true, a liquid market also makes it less costly to hold larger stakes and easier to purchase additional shares. We show that this fact is important if monitoring is costly: market liquidity mitigates the problem that small shareholders free ride on the effort of the large shareholder. We find that liquid stock markets are beneficial because they make corporate governance more effective.