Corporate Governance, Disclosure and Market Liquidity
43 Pages Posted: 11 Mar 2009 Last revised: 26 May 2015
Date Written: May 4, 2015
This paper investigates how corporate decisions such as the choice of corporate governance mechanisms or information disclosure by management, affect firm stock liquidity. The model studies the interaction between a firm's manager and its shareholders and shows that the quality of the firm's dividend report, a result of this interaction, affects information asymmetry in the financial market, and therefore, liquidity. Interestingly, the effect of disclosure quality on liquidity is non-monotonical. The model also highlights the complementarity between internal and external corporate governance mechanisms. Thus, the optimal level of disclosure required to maximize market liquidity increases in the quality of the firm's internal corporate governance mechanisms.
Keywords: Corporate governance, disclosure regulation, market liquidity
JEL Classification: G12, G14
Suggested Citation: Suggested Citation