Corporate Governance and Liquidity
Kee H. Chung
State University of New York at Buffalo - School of Management
Colorado State University
Northern Kentucky University - Haile/US Bank College of Business
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
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 different measures of liquidity.
Number of Pages in PDF File: 42
Keywords: Corporate governance, Spreads, Price impact, Information-based trading, Liquidity
JEL Classification: G10, G34
Date posted: June 11, 2008 ; Last revised: May 31, 2009
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