Corporate Governance and Liquidity

Chung, Kee H.; Elder, John; Kim, Jang-Chul

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Corporate Governance and Liquidity

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

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

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Jang-Chul Kim

Northern Kentucky University - Haile 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: 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