Governance and Liquidity Commonality in Asset Pricing

Governance characteristics are potentially a proxy for information asymmetry that may be better captured by the market liquidity of a company's shares. Although liquidity has been established as a risk factor in the asset-pricing paradigm, there is still an ongoing debate as to whether governance is a priced risk factor. Could they both be priced, despite the commonality between the two due to information asymmetry? We jointly examine both factors in a series of asset-pricing tests to see if clustering of liquidity is responsible for the governance premium. Our results reconfirm the importance of governance in explaining stock returns