Publication Details

Ali, S., Liu, B. & Su, J. (2015). Corporate Governance and Stock Liquidity: Panel Evidence from 2001 to 2013. SFM 2015: The 23rd Conference on the Theories and Practices of Securities and Financial Markets (pp. 1-41).


Constructing a new index of corporate governance quality (CGQ), we provide comprehensive and robust evidence for the association between governance quality and stock liquidity in the pure order-driven stock market of Australia. We hypothesize that governance quality affects stock liquidity because effective governance alleviates information asymmetries between insiders (e.g., managers) and outsiders (e.g., investors), as well as among outsiders by improving the financial transparency of a firm. Consistent with this theoretical argument, by using a large sample of 1,207 firms (10,179 firm-year observations) over the long period from 2001 to 2013, we find a significant positive relationship between governance quality and stock liquidity, suggesting that better governed firms have greatly improved stock liquidity. Specifically, we find that better governed firms have a lower trading cost, smaller price impacts of trade, and higher trading speed. The findings are robust to alternative liquidity proxies and dimensions, to alternative estimation methods, to different sample specifications, and to endogeneity bias.

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