Corporate Governance and Stock Market Liquidity

Abstract

The purpose of this paper is to examine the capital market effects of corporate governance (CG) practices of “comply or explain” on stock market liquidity in a frontier market. Using secondary data from Nairobi Securities Exchange (NSE) liquidity position is analyzed using panel data random effects regression against CG guidelines. The results show a negative and significant relationship between CG compliance and stock market liquidity suggesting that regulated CG practices improves market liquidity in Kenya. The results are remarkably robust to different measures of liquidity and supports agency and signaling theory. We provide evidence that security regulation improves stock market liquidity in a frontier market whose characteristics are thought not to favor regulation. Therefore the regulators and stakeholders could be motivated by the benefits of regulation and this could lead to renewed effort to improve the current compliance from the current 61.4%, to higher levels. Our finding shows that security market regulation through CG guidelines can improve stock market liquidity in frontier markets. This offers regulators and policy makers a strong motivation to enhance security regulation to strengthen capital market confidence.