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Corporate Governance and Liquidity

Published online by Cambridge University Press:  19 February 2010

Kee H. Chung ,
John Elder  and
Jang-Chul Kim
Kee H. Chung
Affiliation:
School of Management, State University of New York (SUNY) at Buffalo, 360 Jacobs Management Center, Buffalo, NY 14260. [email protected]
John Elder
Affiliation:
College of Business, Colorado State University, 1272 Campus Delivery, Fort Collins, CO 80523. [email protected]
Jang-Chul Kim
Affiliation:
College of Business, Northern Kentucky University, Nunn Drive, Highland Heights, KY 41099. [email protected]
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Abstract

We investigate the empirical relation between corporate governance and stock market liquidity. We find that firms with better corporate governance have narrower spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. In addition, we show that changes in our liquidity measures are significantly related to changes in the governance index over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate informational asymmetries. Our results are remarkably robust to alternative model specifications, across exchanges, and to different measures of liquidity.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 2 , April 2010 , pp. 265 - 291
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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