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Blockholders' incentives to intervene in corporate governance are weakened by free-rider problems and high costs of activism. Theory suggests activists may recoup expenses through informed trading of target firms' stock when stocks are liquid. We show that stock liquidity the probability of activism, but less so for potentially overvalued firms where privately blockholders may have greater incentives to sell their stake than to intervene. We also that activists accumulate more stocks in targets the more liquid is the stock. We conclude that liquidity helps overcome the free-rider problem and induces activism via pre-activism of target firms' shares.
Norli et al. (Tue,) studied this question.
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