Corporate Governance and Stock Price informativeness: Evidence from an Emerging Market

• Main Authors: Muhammad Shahid Rasheed, Shahzad Kouser
• Format: Article
• Language: English
• Published: CSRC Publishing 2020-06-01
• Series: Journal of Accounting and Finance in Emerging Economies
• Subjects: Corporate Governance, Synchronicity, Controlling Shareholders, Institutional Investors, Family Ownership.
• Online Access: http://publishing.globalcsrc.org/ojs/index.php/jafee/article/view/1279

Emerging markets usually have weaker legal and governance environment. The weaker enforcement of investor protection laws leads to a poor information environment. Using data of all the listed non-financial firms from Pakistan stock exchange (PSX), we document the relationship between corporate governance variables and stock price informativeness. The results from two-stage least squares (2SLS) reveal that controlling shareholders in the form of block holding plays an effective role in improving informativeness. Due to the presence of these block ownership, the institutional investors remain largely short term investors and act passively. This behavior of institutional investors encourages managers to extract more cash flows leading to higher synchronicity. These findings suggest market regulators develop such a corporate governance mechanism that not only ensures investor protection but also advise firms to reduce information asymmetry by better disclosure and transparency. More specifically, in the Pakistani context, traditional corporate governance mechanisms through board room regulations may not improve informativeness, and regulators need to regulate the ownership regulations, including family ownership and controlling shareholders.