The Effect of Corporate Governance on Liquidity: Voluntary Disclosure, Analyst Coverage, and Adverse Selection as Mediating Mechanisms

Publication Type

Conference Paper

Publication Date



Our paper examines how a firm’s corporate governance relates to the liquidity (i.e., bidask spread) of its stock. In particular, we focus on how voluntary disclosure, analyst coverage, and adverse selection among investors mediate this relation. Our results show that better corporate governance, in terms of greater board independence and greater institutional monitoring, improves liquidity though more voluntary disclosure, greater analyst coverage, and lower adverse selection. The effects of these mediating mechanisms differ in magnitude. Specifically, we find that the key reason to expect better corporate governance to be associated with improved liquidity is reduced adverse selection. This finding is consistent with the argument that the first order effect of better corporate governance is to constrain agency problems such as insider trading and selective disclosure to some investors, which, in turn, could affect stock liquidity.


Corporate governance, voluntary disclosure, analysts, adverse selection, liquidity


Accounting | Business Law, Public Responsibility, and Ethics

Research Areas

Corporate Governance, Auditing and Risk Management


American Accounting Association Financial Accounting and Reporting Section (FARS) Mid-Year Meeting 2009

City or Country

New York, USA