R Available online at www.sciencedirect.com Finance Research Letters 1 (2004) 2–10 www.elsevier.com/locate/frl Shareholder activism is non-monotonic in market liquidity Antonio S. Mello a,∗ and Rafael Repullo b,c a School of Business, University of Wisconsin–Madison, 975 University Avenue, Madison, WI 53706, USA b CEMFI, Casado del Alisal 5, 28014 Madrid, Spain c CEPR, London, UK Received 3 July 2003; accepted 18 November 2003 Abstract Building on work of Maug [Journal of Finance 53 (1998)], we characterize the relationship between market liquidity and large shareholder activism when a minimum ownership share is required to change the management. We show that the sign of this relationship depends on whether the block constraint is binding. Specifically, the probability of intervention is decreasing in the liquidity of the stock when the constraint is binding (which happens in markets with intermediate liquidity), and it is increasing when it is not (which happens in highly liquid markets). We also show that the probability of intervention is zero in illiquid markets.  2004 Elsevier Inc. All rights reserved. Keywords: Shareholder activism; Market liquidity; Corporate control 1. Introduction Maug (1998) analyzes the relationship between market liquidity and shareholder activism. He considers a firm with a large shareholder and a continuum of small investors who are subject to liquidity shocks. The large shareholder can increase the firm’s value if she changes the management and restructures it at a certain cost. The firm’s stock is quoted in a secondary market by a risk neutral and uninformed market maker who sets the share price equal to the expected value of the firm conditional on the information contained in the order flow. The liquidity of this market is directly related to the size of the liquidity * Corresponding author. E-mail addresses: amello@bus.wisc.edu (A.S. Mello), repullo@cemfi.es (R. Repullo). 1544-6123/$ – see front matter  2004 Elsevier Inc. All rights reserved. doi:10.1016/j.frl.2003.11.002