Jang-Chul Kim

Corporate Governance and Liquidity

We investigate the empirical relation between corporate governance and stock market liquidity. We find that firms with better corporate governance have narrower spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. In addition, we show that changes in our liquidity measures are significantly related to changes in the governance index over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate informational asymmetries. Our results are remarkably robust to alternative model specifications, across exchanges, and to different measures of liquidity.

Dividend Payouts and Corporate Governance Quality: An Empirical Investigation

Motivated by agency theory, we investigate how a firms overall quality of corporate governance affects its dividend policy. Using a large sample of firms with governance data from The Institutional Shareholder Services, we find that firms with stronger governance exhibit a higher propensity to pay dividends, and, similarly, dividend payers tend to pay larger dividends. The results are consistent with the notion that shareholders of firms with better governance quality are able to force managers to disgorge more cash through dividends, thereby reducing what is left for expropriation by opportunistic managers. We employ the two-stage least squares approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate governance quality does have a palpable impact on critical corporate decisions such as dividend policy.

The Sarbanes-Oxley Act of 2002 and Market Liquidity

Investors rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity to the capital markets. We find that the rash of financial scandals caused a severe deterioration in market liquidity in the form of wider spreads, lower depths, and a higher adverse selection component of spreads vis-a-vis their benchmark levels. Regulatory responses including the Sarbanes-Oxley Act of 2002 (SOX) had inconsequential short-term liquidity effects but highly significant and positive long-term liquidity effects. These liquidity improvements are positively associated with the improved quality of financial reports, several firm-specific variables (e.g., size), and market factors (e.g., price, volatility, volume).

Capital Structure and Corporate Governance Quality: Evidence from the Institutional Shareholder Services (ISS)

Grounded in agency theory, this study explores how capital structure is influenced by aggregate corporate governance quality. We measure governance quality using broad-based comprehensive governance metrics provided by the Institutional Shareholder Services (ISS). The empirical evidence reveals a robust inverse association between leverage and governance quality. Firms with poor governance are significantly more leveraged. It appears that leverage substitutes for corporate governance in alleviating agency conflicts. Further, we utilize empirical methods that control for endogeneity and show that poor governance quality likely brings about, and does not merely reflect, higher leverage. Our results are important as they show that the overall quality of corporate governance has a material impact on critical corporate decisions such as capital structure choices.

Information Asymmetry and Corporate Cash Holdings: INFORMATION ASYMMETRY AND CORPORATE CASH HOLDINGS

This study analyzes the effect of information asymmetry on corporate cash holdings. Using various measures of information asymmetry, this study shows that companies that operate in environments with higher information asymmetry have smaller cash holdings. This study continues to find a negative relationship between information asymmetry and corporate cash holdings from a battery of sensitivity analyses, including the tests using different regression methods and the difference�?in�?difference tests employing brokerage�?firm merger and closure events. On the whole, the results support the monitoring cost hypothesis of cash holdings over the investment opportunities hypothesis.

A comparison of volatility and bid–ask spread for NASDAQ and NYSE after decimalization

We compare volatility and transaction costs for National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchange (NYSE) firms after decimalization. Using the data of May 2001, our study includes several large samples are matched based on key determinants of volatility and transaction costs. Our findings suggest that volatility on NASDAQ is much higher than on NYSE even after the recent market reforms and decimalization. Transaction costs measured by quoted and effective spreads remain significantly higher on NASDAQ than on NYSE, and these differences cannot be attributed to the differences in the characteristics of the stocks traded in the two markets. In addition, the frequency of small (large) trades inside the quotes is significantly greater (lower) on NYSE than on NASDAQ.

Liquidity and Information Flow around Monetary Policy Announcement

We analyze the effects of monetary policy announcements on stock market liquidity using intraday data. We show that the impairment in liquidity associated with policy announcements occurs primarily after, rather than before, the announcements, and is relatively short-lived, lasting about 1.5 hours. Liquidity impairment varies proportionately with the information content of the policy announcement, with larger effects associated with unscheduled announcements, and scheduled announcements with larger policy surprises. Overall, our results suggest that informed traders have an information processing advantage over uninformed participants rather than access to private information.

The Effect of Corporate Governance on CEO Luck: Evidence from the Institutional Shareholder Services (ISS)

CEOs are “lucky” when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing. Extending the work of Bebchuk et al. (2010), we explore the effect of overall corporate governance quality on CEO luck. Provided by the Institutional Shareholder Services (ISS), our comprehensive governance metrics are much broader than those used in prior studies, encompassing more diverse aspects of corporate governance, such as audit, state laws, boards, ownership, and director education. We show that an improvement in governance quality by one standard deviation diminishes CEO luck by 14.77–21.06%. The governance standards recommended by ISS appear to be effective in deterring the opportunistic timing of option grants.

Market Liquidity and Ambiguity: The Certification Role of Corporate Governance

We investigate how firm-specific certification practices through corporate governance can reduce perceived ambiguity and thus enhance liquidity of a firm in the stock market. We show that better corporate governance helps reduce ambiguity. In addition, a reduction in ambiguity is significantly related to higher liquidity of firms. Our results are robust to alternative model specifications and measures of ambiguity, and remain statistically significant after controlling for other known determinants of ambiguity and liquidity. Our results shed light on how ambiguity can be moderated through firm-level certification practices and on the channel through which a moderation of ambiguity affects shareholder wealth.

Does Corporate Governance Quality Affect Analyst Coverage? Evidence from the Institutional Shareholder Services (ISS)

We examine the impact of corporate governance quality on the extent of analyst coverage. The evidence based on nearly 3000 firms indicates that more analysts are likely to cover firms with weaker corporate governance. In particular, as corporate governance quality falls by one SD, analyst following increases by 11.40%. Our evidence is consistent with the notion that poor governance results in a wider divergence between the stocks market price and the fundamental value. Analysts prefer to cover companies with poor governance because it allows them to generate trading commissions by offering shareholders a particularly compelling story about why a stocks fundamental value and the current price differ.