Corporate Governance and Liquidity

42 Pages Posted: 11 Jun 2008 Last revised: 31 May 2009

Kee H. Chung

State University of New York at Buffalo - School of Management

John Elder

Colorado State University

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business

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 different measures of liquidity.

Keywords: Corporate governance, Spreads, Price impact, Information-based trading, Liquidity

JEL Classification: G10, G34

Suggested Citation

Chung, Kee H. and Elder, John and Kim, Jang-Chul, Corporate Governance and Liquidity. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1142975

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

John Elder

Colorado State University ( email )

Dept of Finance & Real Estate
1272 Campus Delivery
Fort Collins, CO 80523
United States
970-491-2952 (Phone)

HOME PAGE: http://lamar.colostate.edu/~jelder

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Accounting, Finance, and Business Law
Highland Heights, KY 41099
United States
859-572-1486 (Phone)

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