Does corporate governance matter for market liquidity and stock price informativeness? This is an important issue in corporate finance. Gompers, Ishii and Metrick (2003) and Cremers and Nair (2005) document that corporate governance matters for stock price through private incentives of management. Ferreira and Laux (2007) find that less antitakeover provisions is associated with higher idiosyncratic risk and more informative stock price.
Holmstrom and Tirole (1993), Faure-Grimaud and Gromb (2004) and Almazan, Banerji and Motta (2008) show that market liquidity and trading activities affect price informativeness through the costs of performance monitoring and the managerial incentives. These researchers suggest that corporate governance matters for stock price informativeness. These two strands of literature suggest governance and trading activities are important factors of stock price informativeness.
We examine the cross-sectional relation between corporate governance, market liquidity and stock price informativeness. We adopt the aggregation of 24 antitakeover provisions by Gompers et al (2003) to proxy the firm-level corporate governance. Using a sample of US firms in 2001, two patterns emerge. First, stock prices of weak governance firms have more informative price (lower stock price synchronicity) and larger bid-ask spread than that of weak governance firms. Second, bid-ask spread has a positive impact on price informativeness and this impact is stronger for firms with weak governance.
We conjecture that weak corporate governance firms are associated with more informed trading activities as market makers are more sensitive to adjust the spread correspond to trades. Our interpretation is that firms with less antitakeover i.e. strong governance are subject to more intensive market discipline, the insiders have stronger incentive to engage in informative disclosure, making their stock prices more informative and informed trading activities less attractive.
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Corporate Governance, Market Liquidity and Stock Price Informativeness
