Investor protection and market liquidity revisited

2015 ◽  
Vol 15 (4) ◽  
pp. 517-529 ◽  
Author(s):  
Xiaofeng Shi ◽  
Michael Dempsey ◽  
Huu Nhan Duong ◽  
Petko S. Kalev
Keyword(s):  
Corporate Governance ◽  
Hong Kong ◽  
Stock Market ◽  
Common Law ◽  
Investor Protection ◽  
Civil Law ◽  
Market Liquidity ◽  
Stock Liquidity ◽  
Content Type ◽  
Practical Implications

Purpose – This paper aims to establish the relation between corporate governance – as represented by investor protection at both the legal and firm levels – and stock market liquidity. Design/methodology/approach – This paper avails of the unique features of Hong Kong- and China-based stocks that are traded on the Hong Kong Stock Exchange so as to test whether differences between “common law” and “civil law” legal environments contribute to differences in stock liquidity. In addition, by constructing an internal corporate governance index score for each firm based on board size, board independence and information on the audit and remuneration committee, we document whether firms with better corporate governance scores have narrower spreads, greater depth and higher trading volumes. Findings – Overall, results provide support for a linkage between corporate governance issues – as investor rights protection at both the environment and firm protection levels – and stock market liquidity. Research limitations/implications – This paper recognizes that investor protection constitutes a single component of the desirability of investing in a firm’s stock. Nevertheless, it does appear to constitute an important component of a stock’s attractiveness. Practical implications – The practical implications are clear, namely, that good corporate governance of firms leads to their attractiveness as investment vehicles (for both the shorter and the longer terms). Social implications – The paper has clear social implications. In particular, the paper serves to highlight that prospects for enduring wealth creation are contingent on the safeguards accorded to the equity ownership of a firm’s stock. Originality/value – The originality lies in taking advantage of the unique features of the Chinese and Hong Kong firms on the Hong Kong Exchange, so as to examine the contrasting influences of common law and civil law on stock liquidity. Thus, the authors allow for the effects of corporate governance across the two legal environments (China and Hong Kong) to be compared and contrasted while maintaining other influences unchanged across Chinese and Hong Kong shares.

Legal protection systems, corporate governance and firm performance: a cross-country comparison

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yosra Ghabri
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Legal System ◽  
Institutional Environment ◽  
Common Law ◽  
Investor Protection ◽  
Civil Law ◽  
Legal Protection ◽  
Content Type ◽  
Valuation Effect

Purpose This paper builds on the “Law and Finance” theory and aims to examine the effect of the legal and institutional environment on the governance–performance relationship in the context of non-US firms. More precisely, it examines whether and how the country’s legal system and the level of investor protection interact with the firm-level corporate governance and affect firm performance. Design/methodology/approach The authors used the “G-Index” governance score developed by the Governance Metrics International rating for a sample of 12,728 firm-year observations from 23 countries over the 2009–2016 period. Findings The results show that the interaction between the country-level institutions and corporate governance system significantly affect the firm performance. In particular, the findings indicate that firms operating in common law countries tend to exhibit a positive valuation effect and higher performance than firms with a comparable corporate governance level operating in civil law countries. More precisely, the authors find that in common law countries, higher investor protection with enhanced corporate governance is associated with better firm performance. However, firms operating in civil law countries with weaker investor protection and a comparable corporate governance level tend to experience a negative valuation effect. Originality/value The findings suggest that the institutional and legal environment is crucial and important in determining the value-maximizing level of good governance practices. Managers and regulators should carefully analyze the cost of these initiatives and should coordinate it with the needs of the country’s legal system. The challenge for the company will be how to adjust its corporate governance strategy according to the needs and demands of the country’s legal system in which the company operates to improve its performance. The regulators should ensure a fit between the specifics of the national legal and institutional environment and corporate governance standards and practices.

Corporate governance and stock liquidity: evidence from a speculative market

2020 ◽  
Vol 33 (2) ◽  
pp. 323-341 ◽  
Author(s):  
Pallab Kumar Biswas
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Empirical Support ◽  
Market Liquidity ◽  
Policy Implications ◽  
Market Manipulation ◽  
Market Theory ◽  
Stock Liquidity ◽  
Content Type ◽  
Governance Quality

Purpose Grounded in lemon market theory, this paper aims to examine the influence of corporate governance (CG) on stock market liquidity in Bangladesh, where stock market manipulation because of speculative trading is a common concern. Design/methodology/approach This study is based on a sample of 2,420 firm-year observations covering all non-financial firms in Bangladesh from 1996 to 2011. Findings This study’s 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 the governance quality by one standard deviation decreases the illiquidity ratio by 55.97%. The results are unlikely to be confounded by endogeneity. Practical implications The results have important policy implications for security regulators, investors, traders and managers. The results support the current regulatory trend of strengthening CG practices in the listed firms in Bangladesh. Originality/value This study contributes to the understanding of the role of effective firm-level CG on stock liquidity in the context of an emerging country. Consistent with prior research mostly conducted in the advanced economies, it provides further empirical support that higher CG quality reduces the information asymmetry problem and enhances stock liquidity even in a speculative market.

Investor protection, corporate governance and private information-based trading

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chun-Teck Lye ◽  
Chee-Wooi Hooy
Keyword(s):  
Corporate Governance ◽  
Emerging Markets ◽  
Private Information ◽  
Market Competition ◽  
Investor Protection ◽  
Civil Law ◽  
Securities Market ◽  
Market Manipulation ◽  
Content Type ◽  
Securities Laws

Purpose This study aims to examine the effects of investor protection (PROT), internal and external corporate governance (CG) on private information-based trading (PIBT). Design/methodology/approach This study uses a sample of 3,438 firms from 42 countries for the period 2002–2015 to examine the effects of the broad and specific measures of PROT, internal CG and external CG (product market competition and block ownership [BOWN]) on a more accurate measure of PIBT using regression analysis. Findings The results show that PROT and BOWN are effective in reducing PIBT. However, the specific measure of PROT (strength of PROT) is not significant in emerging markets and civil law countries. The internal CG is also significant but has a positive effect on PIBT. Research limitations/implications The results suggest that PROT law matters in the efforts to prevent PIBT. Policymakers and securities market regulators, particularly in emerging markets and civil law countries, should focus more on refining existing securities laws and enacting detailed securities rules that explicitly prevent specific market manipulation and PIBT. Originality/value This study provides evidence for the importance of specific and detailed securities rules in different market and legal environments. Furthermore, this study uses the segregated private information-based speculative trading component to accurately measure the PIBT.

Investor protection: effects of takeover convergence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jyoti Dixit ◽  
Poonam Singh ◽  
Arunima Haldar
Keyword(s):  
Corporate Governance ◽  
Common Law ◽  
Investor Protection ◽  
Critical Role ◽  
Emerging Economy ◽  
International Standards ◽  
Governance Mechanism ◽  
Content Type ◽  
Global Standards ◽  
Corporate Governance Mechanism

Purpose Takeovers play a critical role as an external corporate governance mechanism to ensure investor protection. There is a long-standing debate on whether the convergence of corporate governance to global standards can enable emerging economies to ensure investor protection. This paper aims to analyse the evolution of the takeover code, namely, Securities Exchange Board of India’s Substantial Acquisition of Shares and Takeovers (2011) in India from the lens of investor protection. It then compares the takeover provisions in India, the USA, the UK, Singapore and Australia to examine the extent of convergence and its implications for investor protection. Design/methodology/approach Using a cross-national comparative analysis of takeover mechanisms in common law countries, the study analyses the extent and relevance of convergence in form. The focus of the comparison is on regulations governing offer size, offer price, creeping acquisition and initial trigger limit for the mandatory open offer. Findings The findings suggest that certain provisions such as the initial trigger threshold for the mandatory offer and the offer prices of the Indian takeover code are converging with the standards in common law countries. However, the offer price determination based on market prices may not reflect true market value in an inefficient market like India. Other provisions such as creeping acquisition and offer size are not only diverging from the international standards but are also inconsistent with the key objective of investor protections of the Indian regulator. Research limitations/implications Indian takeover regulation needs to converge to higher global standards to ensure adherence to improved investor protection. This needs to be done for the initial trigger limit for mandatory bid and offer prices, after accounting for the differences in institutional structure. The Indian regulators need to revisit provisions on the initial trigger, creeping acquisition to converge to the broader principle of investor protection. Originality/value This technical paper provides a comprehensive depiction of takeover mechanisms in an emerging economy context as a means of investor protection. Further using a comparative lens, it analyses the relevance of convergence of takeover laws. Thus, advances the theoretical knowledge of limited extant work on external corporate governance mechanism in an emerging economy context.

Political connection and firm value: an Indian perspective

2014 ◽  
Vol 3 (2) ◽  
pp. 170-189 ◽  
Author(s):  
Debabrata Datta ◽  
Santanu K. Ganguli
Keyword(s):  
Corporate Governance ◽  
Theoretical Model ◽  
Stock Market ◽  
Stock Prices ◽  
Empirical Test ◽  
Political Connection ◽  
Content Type ◽  
Election Results ◽  
Political Governance ◽  
Practical Implications

Purpose – The purpose of this paper is to verify existence of political connection of firms in India. For this purpose the paper first presents a theoretical model and then tests empirically the movement of stock prices during two state elections in India. Design/methodology/approach – The methodology is theoretical modelling where the paper applies the standard Cournot model of oligopoly. The paper then applies correlation and Wilcoxon Paired Rank Sum test to verify the results of the theoretical model by using data from the Indian stock market during the election results. Findings – The theoretical result states that some firms opt for political connection and some remain independent in an oligopoly. It also shows that political connection affects stock price. The empirical results find out that divergent responses of stock prices to the election results can be linked to politically connection. Research limitations/implications – The theoretical model is a simple two firm model and not generalized to n number of firms. The empirical test considers only two state elections and applies simple statistical test. The study is restricted to one country only. Practical implications – The paper has practical implications for stock market. It has implications for corporate governance and for political governance. This is important since political connection of firms has emerged as an important issue in India. Social implications – The paper is important as it addresses the issue of political connection of firms, which have ramifications for social equilibrium. In a democratic country like India any nexus between political party and firms may adversely affect not only corporate governance but also political governance. Originality/value – This paper looks at political connectedness theoretically in a federal structure, an issue not addressed so far in the literature. Second it considers not so discussed topic of market perception of political connection in India. The originality of the paper is that it presents a theory and also verifies the theoretical results with empirical test.

scholarly journals Perspectives and obstacles of the shareholder activism implementation: A comparative analysis of civil and common law systems

2015 ◽  
Vol 13 (1) ◽  
pp. 520-533 ◽  
Author(s):  
Khurram Parvez Raja ◽  
Alex Kostyuk
Keyword(s):  
Corporate Governance ◽  
Comparative Analysis ◽  
Stock Market ◽  
Legal System ◽  
Common Law ◽  
Civil Law ◽  
Shareholder Activism ◽  
Legal Systems ◽  
The Usa ◽  
The Uk

The paper outlines shareholder activism development in common law and civil law countries and identifies features of these legal systems that create preconditions and obstacles for shareholder activism. Our findings show that tendencies of shareholder activism depend on the type of the legal system, but also vary within the countries that share the same legal system. Thus, we conclude that the type of legal system is not the chief determinant of shareholder activism. A comparative analysis of shareholder activism in Germany and Ukraine (civil law countries) and the USA and the UK (common law countries) shows that the system of domestic corporate regulation, development of the stock market, companies’ capitalization and corporate governance influence the development of shareholder activism in equal measure.

Institutional investors, information asymmetry and stock market liquidity in France

2015 ◽  
Vol 11 (1) ◽  
pp. 44-59 ◽  
Author(s):  
Aymen Ajina ◽  
Faten Lakhal ◽  
Danielle Sougné
Keyword(s):  
Stock Market ◽  
Information Asymmetry ◽  
Institutional Investors ◽  
Pension Funds ◽  
Market Liquidity ◽  
Least Square ◽  
Institutional Setting ◽  
Stock Liquidity ◽  
Content Type ◽  
Stock Market Liquidity

Purpose – The purpose of this paper is to examine the effect of institutional investors’ ownership and type on information asymmetry and stock market liquidity in France. Design/methodology/approach – The sample includes 162 French-listed firms from 2007 to 2009. The methodology relies on linear regressions using the method of ordinary least square. Before examining the interaction between liquidity and institutional investors, the authors check for the existence of the endogeneity problem by applying the Durbin-Wu-Hausman test of Davidson and MacKinnon (1993). The results of the endogeneity test show that institutional investors’ ownership and stock liquidity are endogenous. A simultaneous equation model using the double least square method is then tested to address this problem. Findings – The findings show that the proportion of institutional investors has a positive and significant effect on stock-market liquidity, which confirms the signal theory and trading hypothesis. These investors perform high trading activity which favorably affects market liquidity. The results also show that pension funds improve stock liquidity. This result suggests that pension funds manage huge assets decreasing transaction costs and improving liquidity. They display a positive signal to the market about more transparency and a low level of informational asymmetry. Practical implications – These results highlight the institutional investors’ role in defining the level of liquidity on the French market. The findings also stress the relevance of developing institutional investors’ demand for the Paris market in order to better assess firm value, protect minority ownership and improve market liquidity. Originality/value – In the French institutional setting, institutional investors act as a control device since minority shareholder interests are less protected than in Anglo-American counterparts. This result highlights the significant role of institutional investors in corporate governance structures and on financial markets. Their presence is a guarantee for minority interest protection and for more liquid stocks.

The determinants of the COVID-19 related stock price overreaction and volatility

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yiyang Val Sun ◽  
Bin Liu ◽  
Tina Prodromou
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Stock Price ◽  
Trading Volume ◽  
Cross Sectional ◽  
Content Type ◽  
Out Of Sample ◽  
Price Reactions ◽  
Stock Price Reactions ◽  
Practical Implications

Purpose This study aims to investigate which stock characteristics and corporate governance variables affect stock price overreaction and volatility during the COVID-19 pandemic period. Design/methodology/approach A set of stock characteristics and corporate governance variables which may affect price overreaction and volatility were identified following a review of the literature. A dummy variable was created for the cross-sectional analysis to take into account the unique sector effect in the consumer staples sector. Out of sample analysis was conducted to confirm the robustness of the main results. Findings The empirical results consistently show that size, dividend and trading volume determine the stock price reactions when the market is in turmoil during the pandemic period. Board size and average board tenure exhibit moderate effects on reducing the stock price reactions, but the effects become insignificant while controlling for the firm characteristics in the regressions. The results remain robust when tested out of the sample. More interestingly, a consumer staples sector effect is identified and tested. The test results show that the consumer staples sector effect mitigates the stock price reactions. Practical implications The results have practical implications for investors who aim to manage desired levels of risk in their portfolios during the pandemic. The results also provide meaningful insights to stock market speculators regarding pandemic-related speculation opportunities. Originality/value This study makes a meaningful connection between the irrational stock market anomalies and the COVID-19 pandemic.

Corporate governance strength and stock market liquidity in Malaysia

2017 ◽  
Vol 13 (5) ◽  
pp. 592-610 ◽  
Author(s):  
Hamdan Amer Al-Jaifi ◽  
Ahmed Hussein Al-rassas ◽  
Adel Ali AL-Qadasi
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Internal Audit ◽  
Market Liquidity ◽  
Estimation Methods ◽  
Content Type ◽  
External Monitoring ◽  
Governance Effectiveness ◽  
Stock Market Liquidity ◽  
The Impact

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.

When are earnings informative?

2019 ◽  
Vol 12 (3) ◽  
pp. 388-406
Author(s):  
Mona A. ElBannan ◽  
Omar Farooq
Keyword(s):  
Stock Market ◽  
Stock Price ◽  
Market Liquidity ◽  
Standard Errors ◽  
Information Asymmetries ◽  
Stock Liquidity ◽  
Content Type ◽  
Reported Earnings ◽  
The Impact ◽  
Robust Standard Errors

PurposeThis paper aims to examine the impact of stock market liquidity on the value of reported earnings in Egypt, proxied by the earnings–return relationship, during the period between 2006 and 2015.Design/methodology/approachTo achieve this objective, this paper uses a sample including all active firms listed on the Egyptian Stock Exchange. This study employs multivariate panel data regression analysis with fixed effects estimated using robust standard errors, and control for other variables. All financial, accounting and stock market data are collected from the Thomson Reuters Worldscope and Datastream databases.FindingsThe empirical results report a significant positive relation between liquidity and earnings informativeness. This study argues that in environments with high information asymmetries, reported earnings are informative conditional on stock liquidity. All results remain valid when using heteroscedasticity-robust standard errors clustered across firms, alternative measures of liquidity, sub-groups of different sizes and estimating quantile regressions.Originality/valueThis paper identifies stock price liquidity as a significant determinant of stock price informativeness of earnings in Egypt. In particular, stock liquidity reduces agency conflicts and information asymmetries between managers and market investors, and thereby decreases managerial incentives to misreport earnings. This consequently enhances the quality of reported earnings and the informativeness of prices.

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