Corporate governance and the stock liquidity in Australia Pitch paper by Searat Ali SIRCA Pitching Research Symposium 27 February 2015 Item A

RQ, Key papers & Motivation Preliminaries RQ, Key papers & Motivation Stock Liquidity Determinants Corporate governance Studies outside Australia Lacks generalizability Stock characteristics Market characteristics Consequences Stock returns Do better governed firms have greater stock liquidity in Australia? Basic research question Item B Item C Item D (See Chai et al., 2010) 1-Trading system (Pure order driven) 2-Intensive disclosure (Signal G) 3-Weak ‘market for control’ 4-High ownership concentration 5-Voluntary CG environment (if not, why not) (e.g., Chung et al., 2010)

Three IDioTs IDEA Corporate governance Information disclosure Information asymmetry Stock liquidity Item E Core Idea: CGQ is assumed to affect stock liquidity through the channel of information disclosure and quality. Specifically, strong CGQ improves operational and financial transparency of a firm and mitigates information asymmetry between insiders (e.g., managers) and outsiders (e.g., investors), as well as among outsiders, which ultimately improves stock liquidity. Central Hypothesis: CGQ improves stock liquidity in Australia Beekes et al., 2014)

Three IDioTs DATA Item F 1 Sampling Strategy: Large cap Australian non-financial firms from 2001-2008. Why? 2 Sample size: 1600 firm-year observations, 450 unique firms. 3 Data sources: CG (Horwath & SIRCA), Stock liquidity (SIRCA), firm characteristics (Morningstar). Data availability: Yes. 4 Data collection: Missing data, tracking name changes, dealing with outliers. 5 Variation in the test variable: CG does not change much over time. Support from prior literature. 6 External Validity: 1) Generalizability to mid cap &small firms 2) Generalizability to post GFC period. 7 Construct validity: Horwath report pays attention to domestic and worldwide standards. Stock liquidity proxies are chosen with literature support.

Three IDioTs TOOLS Empirical framework Pooled OLS Robust SE Year effects Industry effects Alternative methods GLS Random effects Between estimators Endogeneity bias Lagged variable 2SLS GMM Additional analysis Survivorship bias & GFC Omitted variables Sub indices & Additional data Software: Stata 13 Item G

Two One What’s New? The relationship of CGQ with stock liquidity has not been tested in Australia. To capture CGQ, I am using unique dataset of Horwath report + developing a similar index beyond 2008. The prior studies using Horwath report are either cross-sectional or linked CG to firm activities other than stock liquidity. Item H Contribution Investigating the relationship between CGQ and stock liquidity in the context of unique corporate environment of Australia. Item J X Corporate Governance -Horwath Corporate governance index- Australia -Order driven - Disclosure requirements -Market for control -Voluntary CG -Ownership Concentration   Stock Liquidity -High and low frequency- So What? Given CGQ is instrumental to liquidity in Australia; investors, firms & regulators may wish to monitor CG mechanisms more closely so as to devise a sound trading strategies, corporate environment & trading regulations respectively. Item I Fig 1: Mickey Mouse/Venn diagram

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