Does Good Corporate Governance Reduce Information Asymmetry Around Quarterly Earnings Announcements?

37 Pages Posted: 26 Mar 2007 Last revised: 20 Apr 2010

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Dennis J. Whalen

Otterbein College - Department of Business, Accounting & Economics

Date Written: April 3, 2010

Abstract

We examine the relationship between the quality of corporate governance and information asymmetry in the equity market around quarterly earnings announcements. We use the change in market liquidity (i.e., bid-ask spreads and depths) around the announcements as a proxy for information asymmetry. We use principal components analysis to identify three factors, board independence, board structure and board activity, that capture the information in the eight individual corporate governance variables we examine. We then use ordinary least squares and two-stage least squares to estimate the relations between market liquidity changes and the following four explanatory variables: directors' and officers' percentage stock holdings, board independence, board structure, and board activity. Our results indicate that changes in bid-ask spreads at the time of earnings announcements are significantly negatively related to board independence, board activity, and the percentage stock holdings of directors and officers. We also find that depth changes are significantly positively related to board structure, board activity, and directors' and officers' percentage stock holdings. Our results are consistent with the hypothesis that firms with higher levels of corporate governance have lower information asymmetry around quarterly earnings announcements.

Keywords: Corporate Governance, Information Asymmetry, Market Liquidity, Bid-Ask Spread, Depth

JEL Classification: M41, G14, G34, G39, D82

Suggested Citation

Kanagaretnam, Kiridaran and Lobo, Gerald J. and Whalen, Dennis, Does Good Corporate Governance Reduce Information Asymmetry Around Quarterly Earnings Announcements? (April 3, 2010). Journal of Accounting and Public Policy, Vol. 26, No. 4, pp. 497-522, July/August 2007, Available at SSRN: https://ssrn.com/abstract=975216

Kiridaran Kanagaretnam (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Dennis Whalen

Otterbein College - Department of Business, Accounting & Economics ( email )

One Otterbein
Westerville, OH 43081
United States
614-823-1161 (Phone)

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