This essay addresses the link between the liquidity of a firm's equity and the ability of large shareholders to influence control of a firm. Using a sample of U.S. outside blockholdings from 1994-2005, I examine whether liquidity influences the creation of block holdings. Using an instrumental variable approach, I find that liquidity increases the likelihood of blockholdings. Consistent with prior theory, blockholders of more liquid securities take smaller stakes that do not precommit them to

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... nitor. I find evidence that the threat of exit from a block can discipline managers and that this threat is more effective when liquidity is higher. While liquidity increases exit from existing blocks, I find no evidence that illiquidity forces blockholders to monitor. Finally, blockholders' returns are consistent with liquidity facilitating costly monitoring.