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We hypothesize that a source of commonality in a stock's liquidity arises from correlated trading among the stock's investors. Focusing on correlated trading of mutual funds, we find that stocks with high mutual fund ownership have comovements in liquidity that are about twice as large as those for stocks with low mutual fund ownership. We also find that stocks owned by mutual funds with higher turnover have higher commonality in liquidity and that the impact of ownership on commonality is stronger when funds experience liquidity shocks themselves. These results suggest an important role for the demand side of liquidity in explaining commonality.

We use a natural experiment to identify a causal effect of the threat of shareholder litigation on ownership structure, governance, and firm performance. We find that when it becomes harder for small shareholders to litigate, ownership becomes more concentrated and shifts from individuals to institutions. Director and officer governance protections drop among these firms, and operating performance drops among firms whose ownership structure does not change. These results suggest that the ability of shareholders to coordinate and litigate against management is important for governance. This paper was accepted by Lauren Cohen, finance.

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