What determines stock liquidity in Australia?

Abstract

Using an index of corporate governance quality (CGQ), we provide the first robust evidence of the determinants of stock liquidity in Australia. We assume that CGQ affects stock liquidity because effective governance decreases information asymmetries between insiders (e.g. managers) and outsiders (e.g. investors), as well as among outsiders, by improving information transparency of a firm. Consistent with agency theory, this study, using 435 large capitalization firms over the period from 2001 to 2008, finds a significant positive relationship between CGQ and stock liquidity, suggesting that better governed firms have a higher level of stock liquidity. These findings are robust to alternative proxies of CGQ, stock liquidity and endogeneity bias.