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The effects of stock liquidity on firm value and corporate governance: Endogeneity and the REIT experiment

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  • Cheung, William Mingyan
  • Chung, Richard
  • Fung, Scott

Abstract

This study examines the effects of stock liquidity on firm value and corporate governance using the Real Estate Investment Trust (REIT) setting. The unique features of the REIT industry, including homogeneity of the investment structures, the high payout requirement, and the importance of institutional investors, highlight the positive effect of stock liquidity on firm value through corporate governance. To address the endogeneity problem, we perform a difference-in-differences test based on the propensity score matching estimator. The result shows that REIT stock liquidity has a causal and positive effect on firm value, as measured by Tobin's Q. Importantly, REIT stock liquidity is conducive to better corporate governance through the channel of institutional ownership. REIT stock liquidity leads to higher institutional ownership, particularly for institutional investor types that are active monitors and institutional investors with multi-firm ownership in their REIT portfolios.

Suggested Citation

  • Cheung, William Mingyan & Chung, Richard & Fung, Scott, 2015. "The effects of stock liquidity on firm value and corporate governance: Endogeneity and the REIT experiment," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 211-231.
    • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:211-231
    DOI: 10.1016/j.jcorpfin.2015.09.001
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    8. Siti Marsila Mhd Ruslan, 2019. "The Financial Performance of Islamic Real Estate Investment Trusts (REITs) in Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 15(1), pages 191-220.
    9. Kim, Oksana, 2017. "The joint role of the bonding mechanisms and the reduction in market segmentation in valuation of firms cross-listed as Global Depositary Receipts (GDRs)," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 19-38.
    10. Konstantinos Konstantaras & Vasilios Sogiakas, 2019. "Is stock liquidity transferred and upgraded in acquisitions? Evidence from liquidity synergies in US freeze-outs," Annals of Operations Research, Springer, vol. 282(1), pages 179-216, November.
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    19. Osei, Francis, 2022. "The effect of corporate governance elements on employee performance: evident form ghanaian banking industry," Technium Business and Management, Technium Science, vol. 2(3), pages 6-22.
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    22. Deng, Mengdie & Lin, Tse-Chun & Zhou, Jiayu, 2024. "Does better liquidity for large orders attract institutional investors and analysts? Evidence from the Tick Size Pilot Program," Journal of Financial Markets, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Stock liquidity; REITs; Corporate governance; Institutional ownership; Endogeneity;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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