Investor protection and market liquidity revisited

Xiaofeng Shi (Department of Banking and Finance, Monash University, Melbourne, Australia)
Michael Dempsey (School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia)
Huu Nhan Duong (Department of Banking and Finance, Monash University, Melbourne, Australia)
Petko S. Kalev (School of Commerce, University of South Australia, Adelaide, Australia)

Corporate Governance

ISSN: 1472-0701

Publication date: 3 August 2015



This paper aims to establish the relation between corporate governance – as represented by investor protection at both the legal and firm levels – and stock market liquidity.


This paper avails of the unique features of Hong Kong- and China-based stocks that are traded on the Hong Kong Stock Exchange so as to test whether differences between “common law” and “civil law” legal environments contribute to differences in stock liquidity. In addition, by constructing an internal corporate governance index score for each firm based on board size, board independence and information on the audit and remuneration committee, we document whether firms with better corporate governance scores have narrower spreads, greater depth and higher trading volumes.


Overall, results provide support for a linkage between corporate governance issues – as investor rights protection at both the environment and firm protection levels – and stock market liquidity.

Research limitations/implications

This paper recognizes that investor protection constitutes a single component of the desirability of investing in a firm’s stock. Nevertheless, it does appear to constitute an important component of a stock’s attractiveness.

Practical implications

The practical implications are clear, namely, that good corporate governance of firms leads to their attractiveness as investment vehicles (for both the shorter and the longer terms).

Social implications

The paper has clear social implications. In particular, the paper serves to highlight that prospects for enduring wealth creation are contingent on the safeguards accorded to the equity ownership of a firm’s stock.


The originality lies in taking advantage of the unique features of the Chinese and Hong Kong firms on the Hong Kong Exchange, so as to examine the contrasting influences of common law and civil law on stock liquidity. Thus, the authors allow for the effects of corporate governance across the two legal environments (China and Hong Kong) to be compared and contrasted while maintaining other influences unchanged across Chinese and Hong Kong shares.



Shi, X., Dempsey, M., Duong, H.N. and Kalev, P.S. (2015), "Investor protection and market liquidity revisited", Corporate Governance, Vol. 15 No. 4, pp. 517-529.



Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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