Corporate Governance and Stock Market Liquidity of Firms Listed at the Nairobi Securities Exchange

Abstract

Better corporate governance monitoring practices enable firms to trade large size quickly at low cost. Stock market liquidity is an important aspect in the well – functioning of the security markets. The general objective of the study was to investigate corporate governance and stock market liquidity of firms listed at the Nairobi Securities Exchange. The specific objectives of the study were; to evaluate the influence of board effectiveness on stock market liquidity of firms listed at the Nairobi Securities Exchange, to establish the influence of independence of directors on stock market liquidity of firms listed at the Nairobi Securities Exchange, to identify the influence of board structure on stock market liquidity of firms listed at the Nairobi Securities Exchange, to determine the influence of seniority of directors on stock market liquidity of firms listed at the Nairobi Securities Exchange and to ascertain the influence of firm size on the relationship between corporate governance and stock market liquidity of firms listed at the Nairobi Securities Exchange. A survey was conducted on 68 firms listed at the Nairobi Securities Exchange for a period spinning from 2016 to 2020. The study used secondary data obtained from the Nairobi Securities Exchange and the published annual financial reports. Data analysis was primarily done using descriptive statistics. The descriptive statistics; mean, median, minimum, maximum and standard deviation were used. Further, correlation and regression analysis within the panel data framework were used. Data was subjected to diagnostic tests with Eviews 7 being the main statistical tool of analysis. Board effectiveness had positive and significant influence on stock market liquidity of firms listed at the Nairobi Securities Exchange when quoted spread was used as measure but no significant influence when measured by turnover, illiquidity and liquidity ratio. Independence of directors had no significant influence on stock market liquidity. Board structure had negative and significant influence on stock market liquidity when measured by turnover but no significant influence when measured by quoted spread, illiquidity and liquidity ratio. Seniority of directors had negative and significant influence on stock market liquidity when measured by quoted spread and liquidity ratio but no significant influence when turnover and illiquidity were used. Firm size was found to have no significant influence on the relationship between corporate governance and stock market liquidity of firms listed at the Nairobi Securities Exchange. The findings further indicated that of the four stock market liquidity measures of quoted spread, turnover, illiquidity and liquidity ratio, illiquidity was the best measure of stock market liquidity. The study recommended that firm managers, investors and regulators should monitor internal governance mechanisms more closely in order to understand the causes of the firms’ inability to trade large size quickly at a low cost.