IDEAS home Printed from
   My bibliography  Save this paper

Stock Markets Liquidity, Corporate Governance and Small Firms


  • Solomon Tadesse



While the importance of equity markets as a vehicle for capital formation is well recognized, their role in providing economically valuable governance services, particularly to small and medium enterprises (SME), has not received much attention. The paper examines the role of public policy in promoting the governance role of secondary equity markets for the benefit of SMEs. The paper first outlines the mechanisms through which equity markets could promote good governance in small firms, showing that equity markets serve as a monitoring and control conduit for outsiders to enforce good governance at the firm. It then establishes that the ability of equity markets to deliver good governance is closely related to those markets??? liquidity, presenting further international evidence that firms supported by liquid equity markets realize improved economic performance. Thus, the governance services of secondary equity markets have real economic value to the firms. The paper then argues that public policy can have a positive impact on the effectiveness of equity markets in delivering governance services through enhancing market liquidity. It examines the impact on market liquidity of two significant U.S. Securities and Exchange Commission (SEC) regulatory reforms applied to The Nasdaq Stock Market: SEC???s ???trade reporting??? rules of 1992, and SEC???s ???order handling??? reforms of 1997. The paper concludes that public policies that increase market transparency and efficiency???such as ???trade reporting??? requirements and better ???order handling??? rules???promote the effectiveness of the secondary equity markets in delivering corporate governance through increased market liquidity.

Suggested Citation

  • Solomon Tadesse, 2005. "Stock Markets Liquidity, Corporate Governance and Small Firms," William Davidson Institute Working Papers Series wp883, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2007-883

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Governance; Stock Markets and Liquidity;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wdi:papers:2007-883. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (WDI). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.