Abstract
II address the way agency incentives evolve, from listed equity with low liquidity to highly liquid stocks with active informed speculators. I conclude that, as the informativeness of stock price about the manager’s actions improves, less weight needs to be given to both equity and non-price incentives due to this higher quality. Hence managerial pay-performance sensitivity should be lower in more liquid stocks but higher in illiquid start-ups and where face-to-face monitoring is impossible (franchise contracts). The model explains why firms with low inside-ownership and high liquidity increasingly dominate the U.S. market even as the total number of listings declines.
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