Better corporate governance leads to better liquidity, according to a recent study by a leading think tank.
Capital Markets Co-operative Research Centre, the Sydney-based research consortium, has found greater board independence can lower the probability of informed trading, resulting in greater liquidity provision and smaller price delay.
“Firms with higher board independence are less likely to engage in earnings management and financial statement fraud, as well as provide more frequent financial statement disclosures and timely forecasts to the broader market,” said Angelo Aspris, discipline of finance at the University of Sydney’s school of business and co-author of the report. “By improving an investor’s ability to discern the intrinsic value of an asset, board independence is positively related to market liquidity and efficiency.”
The study found firms with a higher stock price, greater turnover, lower volatility and more investment analysts following them have lower relative quoted bid-ask spreads. These firms are more likely to have independent boards.
Aspris said firms with independent boards also exhibit narrower spreads, a lower price impact, and lower levels of adverse selection.
The study considered 239 firms listed on the Australian Securities Exchange over the period 2004 to 2009 and their liquidity based on Reuters intra-day data.