Board Independence, Stock Liquidity, and Price Efficiency

Abstract

Many recent governance reforms require that a majority of directors on corporate boards should be independent, and that only independent directors should serve on firm sub-committees. We examine the efficacy of these reforms by examining how board independence affects market liquidity and price efficiency. We focus on a comprehensive sample of 239 listed firms from 2004 to 2009 and find that firms with greater board independence have narrower spreads and greater speed of adjustment to new information. Additionally, improvements in board independence over time are positively associated with improvements in firm liquidity and efficiency. The results suggest that greater board independence can lower the probability of informed trading resulting in greater liquidity provision and smaller price delay.

Keywords: Corporate governance, board independence, directors, liquidity, market efficiency

JEL Classification: G14, G39