Corporate Governance, Legal System, and Stock Market Liquidity: Evidence Around the World

Abstract

This study shows that firms in the common law countries tend to have better corporate governance structures and greater stock market liquidity than firms in civil law countries. Stock market liquidity is greater for firms with a superior governance structure regardless of the legal origins of the relevant country (i.e., in both common and civil law countries), than for firms with an inferior governance structure. Our findings suggest that legal and regulatory environments for protecting shareholders at the country level and good corporate governance at the firm level are complementary because strong shareholder protection rights reinforce the effectiveness of corporate governance in improving stock market liquidity.