The effect of corporate governance on stock liquidity: The case of Thailand

Abstract

Grounded in agency theory, this study explores the effect of corporate governance on equity liquidity in Thailand. Theory suggests that effective governance enhances financial and operational transparency, which in turn, reduces adverse selection. Facing less adverse selection problems, traders provide more liquidity to stocks of well-governed firms. Based on a sample of largest firms in Thailand from 2006 to 2009, our results show a significant relationship between governance and liquidity within firms over time. In particular, within firms, when governance quality increases, liquidity significantly improves. For instance, a rise in governance quality by one standard deviation improves the liquidity ratio by 26.19%. We also show that our results are unlikely confounded by endogeneity. © 2014 Elsevier Inc.