The hidden cost of liquidity.

Summary Market liquidity seems to have a cost, hidden in the shareholder structure, in terms of firm performance. Based on Bhide (1993), we test the links between liquidity and ownership structure on the one hand, and between the latter and firm performance on the other. The empirical studies focus on two samples of French companies, the first consisting of 35 companies belonging to the CAC 40 for the years 1988, 1989 and 1990, the second consisting of 217 companies belonging to the SBF 250 for the year 1995. The results indicate that liquidity seems to increase the instability and dispersion of the shareholder base, the latter leading to a decrease in the firm's performance. Thus, the liquidity of a stock would lead to a change in the shareholder structure, which would become more unstable, leading to a passive shareholder base in its function of controlling management, and more dispersed, reducing the probability that a reference shareholder would be likely to exercise control over the management. This reduction in management control would ultimately lead to a decline in the company's performance.