Corporate governance and liquidity: Pre- and post-crisis analysis from the MENA region

Omar Farooq, Mohamed Derrabi, Monir Naciri

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalReview of Middle East Economics and Finance (Online)
ISSN1475-3685
Publication statusPublished - 2012

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Corporate governance
Liquidity
Middle East and North Africa
Corporate liquidity
Corporate governance mechanisms
Outsider
Turnover
Uncertainty
Auditors
Bahrain
Morocco
Insider
Kuwait
Information asymmetry
Agency problems
United Arab Emirates
Saudi Arabia
Jordan
Egypt
Dividend payout

Cite this

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title = "Corporate governance and liquidity: Pre- and post-crisis analysis from the MENA region",
abstract = "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.",
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Corporate governance and liquidity : Pre- and post-crisis analysis from the MENA region. / Farooq, Omar; Derrabi, Mohamed ; Naciri, Monir .

In: Review of Middle East Economics and Finance (Online), 2012.

Research output: Contribution to journalJournal articleResearchpeer-review

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AU - Derrabi, Mohamed

AU - Naciri, Monir

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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.

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