Ernst Maug
Duke University, Durham, NC 27708
ABSTRACT
This paper analyzes the inclinations of large shareholders to monitor corporations whose shares are publicly traded. The main objective is to investigate the hypothesis that a liquid stock market reduces monitoring since it allows large shareholders an easier exit. The paper shows that this is generally not the case. In a more liquid stock market, large investors have a stronger incentive to hold larger positions in companies and benefit from monitoring through purchases of additional shares in the market. Moreover, in a liquid market it is less costly to hold larger stakes. This effect dominates the impact of an easier exit route in a more liquid market. The paper also shows that large shareholders who can choose between monitoring and hostile takeovers as an intervention method will tend to choose the cheaper method in an illiquid market, and the more effective method in a liquid market. The paper concludes that liquid.