Corporate Governance and Firm Liquidity: Evidence from the Chinese Stock Market

This paper examines the cross-sectional relation between corporate governance and firm liquidity in the Chinese stock market. We construct a measure of overall quality of governance based on publicly available information for each firm listed on the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) for each year over the 1999-2004 interval. After accounting for other liquidity-related factors, we present strong evidence that the level of corporate governance is positively related to firm liquidity. An increase of 1 percent in corporate governance index (total 100 percent) is on average associated with a 1.2 percent increase in a firm's annual turnover ratio over the subsequent year. Results from examinations of subindices of corporate governance provide further support for the positive governance-liquidity relation. These findings have important implications for academics to investigate the value of enhancing corporate governance, and for regulators to promote corporate governance reform.