Does Good Corporate Governance Reduce Information Asymmetry Around Quarterly Earnings Announcements?
Kiridaran (Giri) Kanagaretnam
York University - Schulich School of Business
Gerald J. Lobo
University of Houston - C.T. Bauer College of Business
Dennis J. Whalen
Otterbein College - Department of Business, Accounting & Economics
April 3, 2010
Journal of Accounting and Public Policy, Vol. 26, No. 4, pp. 497-522, July/August 2007
We examine the relationship between the quality of corporate governance and information asymmetry in the equity market around quarterly earnings announcements. We use the change in market liquidity (i.e., bid-ask spreads and depths) around the announcements as a proxy for information asymmetry. We use principal components analysis to identify three factors, board independence, board structure and board activity, that capture the information in the eight individual corporate governance variables we examine. We then use ordinary least squares and two-stage least squares to estimate the relations between market liquidity changes and the following four explanatory variables: directors' and officers' percentage stock holdings, board independence, board structure, and board activity. Our results indicate that changes in bid-ask spreads at the time of earnings announcements are significantly negatively related to board independence, board activity, and the percentage stock holdings of directors and officers. We also find that depth changes are significantly positively related to board structure, board activity, and directors' and officers' percentage stock holdings. Our results are consistent with the hypothesis that firms with higher levels of corporate governance have lower information asymmetry around quarterly earnings announcements.
Number of Pages in PDF File: 37
Keywords: Corporate Governance, Information Asymmetry, Market Liquidity, Bid-Ask Spread, Depth
JEL Classification: M41, G14, G34, G39, D82Accepted Paper Series
Date posted: March 26, 2007 ; Last revised: April 20, 2010
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