Does Internal Governance Govern Intraday Corporate Bond Liquidity? Evidence from Corporate Earnings Announcements

Abstract

Extensive studies in the extant literature of market microstructure explore the informational efficiency of the specific financial market and the relative efficiencies across different markets. However, relatively less research has accumulated to date regarding whether or not institutional details of firm and management team are related to the liquidity of financial securities. Accordingly, this study strives to investigate whether and how the intraday corporate bond liquidity is associated with corporate internal governance, a governance mechanism stemming from the structure of the top management team. In particular, it is focused on the time window shortly before earnings announcements when the information asymmetry is heightened. Consistent with the implications of the theoretical model of internal governance, the paper uncovers a hump-shaped relationship between internal governance measure and corporate bond liquidity before earnings announcements. The empirical results are generally persistent across a battery of robustness checks such as sensitivity check by trading frequency and window size, subsample test by corporate bond rating, and firm level aggregation analysis. Specifically, it is found that the hump-shaped functional form becomes more salient for shorter windows, non-investment level bonds, and bonds of higher trading frequency. As the primary identification strategy, I use the 2008 financial crisis. The hump-shaped relationship persists in the face of exogenous shock to internal governance measures.  This novel study contributes to the literature of financial economics, corporate governance and market microstructure. The research also supports the claim that the corporate bond market is informationally efficient.