(Joint with Peter Roosenboom and Manuel Vascocelos)
We test whether stock liquidity affects acquirer returns through its hypothesized effect on institutional monitoring. We find that firms with lower stock liquidity have higher acquirer gains for takeovers of unlisted targets, but not for takeovers of listed targets. The relation between liquidity and bidder gains is stronger when the threat of disciplinary trading by institutions is weaker and acquirers have potentially higher agency costs. Acquirers of unlisted targets with lower stock liquidity are more likely to withdraw deals that are poorly received by the market, experience higher involuntary CEO turnover following value-destroying acquisitions, and pay lower premiums. Our results support the hypothesis that stock liquidity weakens the incentives of institutions to monitor management decisions.