Corporate Governance, Noise Trading and Liquidity of Stocks

Abstract: Our main task is to study the effect of corporate governance on the market liquidity of listed companies' stocks. We establish a theoretical model that contains the heterogeneity of investors' beliefs to explain the mechanisms by which corporate governance improves liquidity of the corporate stocks. In this process we found that the existence of noise traders who are semi-informed in the market is an important condition for corporate governance to have the effect of improving liquidity of the stocks. We further find that the strength of this effect is affected by the degree of noise traders' participation in market transactions. Our model reveals that corporate governance and the degree of noise traders' participation in transactions have a synergistic effect on improving the liquidity of the stocks.