TY - JOUR
T1 - Corporate governance and liquidity
T2 - Pre- and post-crisis analysis from the MENA region
AU - Farooq, Omar
AU - Derrabi, Mohamed
AU - Naciri, Monir
PY - 2012
Y1 - 2012
N2 - This paper examines the impact of corporate governance mechanisms on liquidity in the MENA region, i.e. Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait, and Bahrain. Using turnover as a proxy for liquidity, we document significant difference in liquidity between the pre- and the post-crisis periods in the MENA region. In addition, our results show that bulk of this reduction in turnover can be explained due to weaknesses of corporate governance mechanisms. For example, that dividend payout ratio and choice of auditors – proxies for agency problems – can explain the entire difference in liquidity between the two periods. Furthermore, our results indicate that more than 50% of this difference between the two periods can be explained by operational and informational complexity of a firm – proxy for transparency. We argue that poor corporate governance mechanisms increase information asymmetries between insiders and outsiders. Outsiders, being liquidity providers, therefore do not trade in stocks for which they have no information. Therefore, firms with poor governance mechanisms usually experience higher decline in liquidity during periods of market-wide uncertainty.
AB - This paper examines the impact of corporate governance mechanisms on liquidity in the MENA region, i.e. Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait, and Bahrain. Using turnover as a proxy for liquidity, we document significant difference in liquidity between the pre- and the post-crisis periods in the MENA region. In addition, our results show that bulk of this reduction in turnover can be explained due to weaknesses of corporate governance mechanisms. For example, that dividend payout ratio and choice of auditors – proxies for agency problems – can explain the entire difference in liquidity between the two periods. Furthermore, our results indicate that more than 50% of this difference between the two periods can be explained by operational and informational complexity of a firm – proxy for transparency. We argue that poor corporate governance mechanisms increase information asymmetries between insiders and outsiders. Outsiders, being liquidity providers, therefore do not trade in stocks for which they have no information. Therefore, firms with poor governance mechanisms usually experience higher decline in liquidity during periods of market-wide uncertainty.
M3 - Journal article
SN - 1475-3685
JO - Review of Middle East Economics and Finance (Online)
JF - Review of Middle East Economics and Finance (Online)
ER -