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We investigate the empirical relation between corporate governance and stock market liquidity. We find that firms with better corporate governance have narrower spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. In addition, we show that changes in our liquidity measures are significantly related to changes in the governance index over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate informational asymmetries. Our results are remarkably robust to alternative model specifications, across exchanges, and to different measures of liquidity.

In this study we examine the relation between corporate governance and institutional ownership. Our empirical results show that the fraction of a company’s shares that are held by institutional investors increases with the quality of its governance structure. In a similar vein, we show that the proportion of institutions that hold a firm’s shares increases with its governance quality. Our results are robust to different estimation methods and alternative model specifications. These results are consistent with the conjecture that institutional investors gravitate to stocks of companies with good governance structure to meet fiduciary responsibility as well as to minimize monitoring and exit costs.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on Mon, AbstractIn this study, we examine the impact of security analysts' monitoring and marketing func? tions on firms' market value. We postulate that security analysts' monitoring of corporate performance helps motivate managers, thus reducing the agency costs associated with the separation of ownership and control. We also argue that the information intermediary function provided by security analysts helps expand the breadth of investor cognizance. Consistent with these conjectures, this study finds that analyst following exerts a significant and positive impact on firms' market value. We also find evidence that security analysts have a stronger incentive to follow stocks of high quality companies, since such stocks are easier to market. Hence, the security analysis activities appear to be determined, in part, by the marketing considerations of brokerage companies. I. Introduction Security analysts are among the most important information intermediaries between firms and investors. Thousands of security analysts employed by bro? kerage houses and independent research services follow a large population of companies.Analysts routinely collect and process an enormous amount of in? formation from corporate insiders/managers and subsequently disseminate this information to current and prospective investors. Indeed, many investors, both individual and institutional, rely on the information (e.g., corporate earnings fore? casts and industry analysis) provided by financial analysts when they do portfolio selections/revisions.Despite the pivotal roles played by security analysts in the financial market, the causes and ramifications of analyst following have not received much attention in the literature. Most previous studies of analysts' forecasts have focused on the information content of analysts' forecasts (see, e.g., Givoly and Lakonishok (1979), Dempsey (1989), Abarbanell (1991), and Stickel (1991)) or the relative

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In this study, we argue that share price reaction to a ®rm's capital expenditure decisions depends critically on the market's assessment of the quality of its investment opportunities. We postulate that announcements of increases (decreases) in capital expenditures positively (negatively) a ect the stock prices of ®rms with valuable investment opportunities. Contrarily, we predict that announcements of increases (decreases) in capital spending negatively (positively) a ect the share prices of ®rms without such opportunities. Our empirical results are generally consistent with these predictions. Overall, empirical evidence supports our conjecture that it is the quality of the ®rm's investment opportunities rather than its industry a liation which determines the share price reaction to its capital expenditure decisions. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G14

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