Agency Costs and Strategic Speculation in the US Stock Market

This study investigates the notion that agency-driven information asymmetry may affect a firm's stock liquidity. I postulate that less uncertainty about managerial agency problems may enhance liquidity provision by lowering dealers' perceived adverse selection risk from trading with better-informed speculators. Consistent with my conjecture, I find that the staggered adoption of antitakeover provisions across U.S. states in the 1980s and 1990s - a plausibly exogenous shock unambiguously reducing the threat of (and speculators' information advantage about) value-enhancing intervention - robustly improves the stock liquidity of affected firms relative to peer firms, especially at prior high fundamental or agency uncertainty and with poor governance. (JEL D22, G14, G34) Received January 14, 2020; editorial decision January 31, 2022 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.