Stock liquidity and activist blockholders: friend or foe?

ABSTRACT

This paper investigates the effect of stock liquidity on blockholders for Malaysian public listed companies over a 19-year period from 2000 to 2018. Using five liquidity proxies, our results show a negative relationship between liquidity and blockholders. The negative effect of liquidity on blockholders is stemming from governance theory implies that greater stock liquidity decreases the cost of exit, and hence magnifies blockholders threat of exit when they are dissatisfied with company performance. Our results are robust to a battery of sensitivity tests, including endogeneity and disaggregate types of blockholders.

KEYWORDS:

• Liquidity
• blockholder governance
• firm-level
• Malaysia

JEL CLASSIFICATION:

• G10
• G34
• G38

Acknowledgments

We thank Universiti Malaysia Sabah for financial funding this research (Grant No: SGA0012-2019).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Empirically, Roosenboom, Schlingemann, and Vasconcelos (2014) provide evidence from corporate takeovers implying that liquidity weakens the incentives for institutional investors to monitor, hence inducing investors to exit. Their empirical results are consistent with Back, Li, and Ljungqvist (2015) who show that higher liquidity reduces blockholder activism with their lower trading cost, thereby discouraging blockholders intervention.

² https://www.thestar.com.my/business/business-news/2021/07/12/foreign-investors-offload-rm32398mil-of-malaysian-stocks.

³ We use a one-year lagged value of CPQS as an instrument. The Wald test rejects the null hypothesis of instruments are weak.

Additional information

Funding

This work was supported by the Centre for Research and Innovation, Universiti Malaysia Sabah [SGA0012-2019].