Scott Weisbenner is the William G. Karnes Professor of Finance at the University of Illinois. This post is based on a recent paper authored by Professor Weisbenner; Stephen G. Dimmock, Associate Professor of Finance at Nanyang Technological University; William Christopher Gerken, Assistant Professor of Finance at University of Kentucky Gatton College of Business and Economics; and Zoran Ivkovich, Professor of Finance at the Michigan State Eli Broad College of Business.
Does liquidity—the ability of shareholders to sell their shares easily—improve or harm corporate governance? Coffee (1991) and Bhide (1993) argue that liquidity is harmful for corporate governance because investors can more readily take the “Wall Street Walk” by selling their shares and thus avoid engaging in costly governance activities. In contrast, others have argued (see the review by Edmans (2014)) that liquidity can improve corporate governance because the threat of exit constrains management, and this threat is more credible when shares are liquid.