The Effect Of Independent Board On Stock Liquidity In East Asian Countries
Loading...
Date
2016-03
Authors
Bazrafshan, Ebrahim
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
This study investigates the relationship between board composition and liquidity
of a firm’s shares using sample from East Asian countries. The data comprises 2,407
firm-year observations of listed companies in the stock markets of China, Hong Kong,
Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand, and Indonesia over the
period 2003-2013. To address endogeneity issue, this study conducts a dynamic panel
generalized method of moments (GMM) to control for dynamic endogeneity,
unobservable heterogeneity, and simultaneity. The present study finds strong evidence
that greater board independence significantly increases liquidity. In this study, the
impact of board independence on liquidity is suggested to be affected by three channels
of information flow from managers to the board and the public: (1) when the board is in
the midst of considering replacing the CEO, the flow of information from the CEO to
the board may be impeded. This effect clearly can be exacerbated when the board is
more independent of the CEO, and this study finds that in these periods, the beneficial
impact of independence on liquidity is impaired; (2) when market makers are better
equipped to process information independently, the importance of board independence
on liquidity is reduced; (3) finally, when there are already greater investor protections in
place that make board supervision of managers less crucial, this will reduce the impact
of independence board on liquidity. These results are inconsistent with the general
notion that increasing monitoring by an independent board is always helpful in
mitigating informational asymmetries, and then influence for better market makers’
confidence, and ultimately liquidity. The results of this study indicate that boards may
contribute value by advising as well as disciplining managers, and good advice and
effective monitoring require a framework of trust and information sharing. When
relations with their boards are strained, CEOs may actively attempt to suppress the
information reaching the board, especially when it is dominated by independent
directors. Therefore, board independence may generate its own agency costs by
aggravating incentives for managers to manipulate the quality of information. This study
provides empirical evidence that the relative advantage of board independence must be
conditioned on both the negotiating strength of the CEO relative to the board as well as
the information environment.
Description
Keywords
The relationship between board composition , and liquidity of a firm’s shares.