Corporate governance strength and stock market liquidity in Malaysia
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 24 August 2017
Issue publication date: 22 September 2017
Abstract
Purpose
The purpose of this paper is to examine the impact of corporate governance strength on stock market liquidity in an emerging country, namely, Malaysia, by constructing a corporate governance score that captures both internal monitoring mechanisms (board of directors’ characteristics, audit committee’s characteristics and internal audit function) and external monitoring mechanism (audit quality).
Design/methodology/approach
The study uses a sample of 2,020 yearly firm observations in Bursa Malaysia over the period 2009-2012. The ordinary least square regression and several estimation methods such as two-stage least squares using instrumental variables (IV-2SLS) and dynamic GMM are employed.
Findings
This study finds a significant positive association between corporate governance effectiveness and stock market liquidity. The finding is robust to alternative liquidity measurements, to alternative estimation methods, and to endogeneity bias.
Research limitations/implications
This result implies that the firms with effective monitoring mechanisms mitigate information asymmetry which leads to less adverse selection problems among traders.
Practical implications
This study provides implications for regulators to help design regulations that enhance stock market liquidity. This study could also help investors and traders to formulate their trading decisions, and enables firms to know the importance of strengthening the corporate governance monitoring mechanisms.
Originality/value
This study constructs a corporate governance effectiveness measure by combining both internal and external monitoring mechanisms. These mechanisms have not been constructed together in one score in the corporate governance literature and the impact of internal audit function, as an internal monitoring mechanism on liquidity, has yet to be examined.
Keywords
Citation
Amer Al-Jaifi, H., Hussein Al-rassas, A. and Ali AL-Qadasi, A. (2017), "Corporate governance strength and stock market liquidity in Malaysia", International Journal of Managerial Finance, Vol. 13 No. 5, pp. 592-610. https://doi.org/10.1108/IJMF-10-2016-0195
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited