Liquidity and Large Shareholder Monitoring

Abstract

Permanent or long-term large shareholders have different governance incentives and mechanisms from institutional investors. Liquidity could facilitate either cutting and running by large shareholders or, alternatively, increased monitoring. Using an exogenous shock to liquidity in China, we document evidence of no cutting and running. We find that board members representing large shareholders become less busy and more diligent, while busyness and diligence of independent directors are not affected by liquidity. Large shareholders also improve compensation contracts by increasing pay-performance sensitivity. These effects are more pronounced when gains from monitoring are higher or monitoring is less susceptible to the free-rider problem.

Keywords: large shareholders; liquidity; corporate governance; split-share structure reform; board of directors; executive compensation

JEL Classification: G32; G34; G38