Corporate governance and its effect on the liquidity of a stock: evidence from the MENA region

Abstract

What causes investors to trade in certain stocks more than the others? We answer this question by documenting significant relationship between various proxies of corporate governance mechanisms and liquidity in the MENA region. Our results show that higher analyst following, lower ownership concentration, and having Big-Four auditors as external auditors lead to higher liquidity. All of these factors are considered to be the proxies of better corporate governance mechanisms. We argue that better corporate governance mechanisms lower the extent of adverse selection problems and therefore lead to higher liquidity. Our results indicate that managers can improve information environment of a firm, if they want to increase tradability of their stocks. Interestingly, our results show a negative relationship between dividend payout ratio and liquidity. Consistent with Banerjee et al. (2007), we argue that frictions in the MENA region stock markets lead to high demand for dividends in less liquid stocks, thereby resulting in negative relationship between the two.Reference to this paper should be made as follows: Farooq, O. and Seffar, M. (2012) 'Corporate governance and its effect on the liquidity of a stock: evidence from the MENA region', Int.

Board Structure and Stock Market Liquidity: Evidence from Saudi's Banking Industry

“…They found that a higher number of non-executive directors and more frequent board meetings are associated with higher stock market liquidity. Farooq and Seffar (2012) used the Big Four auditors, ownership concentration and analyst following as proxies of corporate governance. They found that these mechanisms have a positive correlation with stock market liquidity in the MENA region.…”

Drivers of convergence/divergence of corporate governance codes of MENA countries

“…Although some previously published corporate governance studies related to the MENA (Middle Eastern and North African) region exist, they are mainly about individual or selected countries' or firms' practices at the micro level (e.g. Bremer & Ellias, 2007;Farooq & Chetioui, 2012;Farooq & Seffar, 2012;Kamal Hassan, 2012;Farooq & AbdelBari, 2013;Al-Malkawi et al, 2014). This paper covers the topic from the macro-level and regional-level standpoint through examining the corporate governance codes for all the sixteen MENA countries.…”