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. Each year 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) 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% in corporate governance index (total 100%) is on average associated with 1.2% 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.