What causes investors to trade in certain stocks more than the others? We answer this question by documenting significant relationship between various proxies of corporate governance mechanisms and liquidity in the MENA region. Our results show that higher analyst following, lower ownership concentration, and having big-four auditors as external auditors lead to higher liquidity. All of these factors are considered to be the proxies of better corporate governance mechanisms. We argue that better corporate governance mechanisms lower the extent of adverse selection problems and therefore lead to higher liquidity. Our results indicate that managers can improve information environment of a firm, if they want to increase tradability of their stocks. Interestingly, our results show a negative relationship between dividend payout ratio and liquidity. Consistent with Banerjee et al. (2007), we argue that frictions in the MENA region stock markets lead to high demand for dividends in less liquid stocks, thereby resulting in negative relationship between the two.
International Journal of Business Governance and Ethics, 2012, Vol 7, Issue 3, p. 232-251