Effects of Corporate Governance Quality and Ownership Structure on Stock Liquidity: Evidence from the Alternative Investment Market (AIM)

Abstract

This study examines the impact of corporate governance quality, ownership structure and ownership identity on the stock liquidity of public firms in the UK. The research uses a sample of 595 firms from the non-financial sector listed on the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange, over a seven year period from 2010 to 2016. In particular, the main objective of this study is to investigate the effect of corporate governance quality, ownership structure and ownership identity on stock liquidity in the FTSE AIM All- Share Index. After controlling for endogeneity problems, i.e. unobserved heterogeneity, simultaneity and dynamic endogeneity by using the application of dynamic panel model (system GMM), this research finds that corporate governance quality, ownership structure and ownership identity are significant determinants of stock liquidity in the AIM. This study constructs a corporate governance quality index by following the guidelines and principles of the Quoted Companies Alliance (QCA). The index of this study contains 40 variables which are distributed across four main governance categories: board composition, board committees, board transparency, and remuneration policy structure. This study finds that corporate governance quality is positively related to stock liquidity. In addition, the finding holds across the four governance categories: board composition, board committees, board transparency and remuneration policy structure. Besides this, based on the mediation model of the Baron and Kenny (1986), the study finds that corporate governance quality affects stock liquidity through information disclosure. In particular, firms with higher corporate governance quality tend to enhance their information disclosure, which in turn improves stock liquidity. Regarding ownership structure, it is evidenced that insider ownership, institutional ownership and ownership concentration have negative relationships with stock liquidity. In contrast, number of institutions and minority shareholders have a positive relationship with stock liquidity. Furthermore, as found in the third empirical study, this study found significant effects of different ownership identity on stock liquidity. In particular, free float ownership, foreign ownership and pension fund ownership are found to positively influence stock liquidity, whereas cross-holding ownership, employee ownership, investment bank ownership and other- holding ownership have negative relationships with stock liquidity. The findings of this study provide implications for UK regulators, AIM firms’ management teams and AIM firms’ stakeholders and especially shareholders.