Board independence, board diligence and liquidity in Malaysia: A research note Yee-Boon Foo a,⇑ , Mazlina Mat Zain b a School of Business, Monash University, Jalan Lagoon Selatan, 46150 Bandar Sunway, Selangor, Malaysia b Faculty of Management, Multimedia University, Persiaran Multimedia, Cyberjaya, 63100, Malaysia article info Article history: Received 24 September 2009 Revised 29 September 2010 Accepted 5 October 2010 Available online 19 October 2010 Keywords: Information asymmetry Liquidity Board independence Board diligence Malaysia abstract This study examines the relationship between board independence, board diligence and liquidity in Malaysia, an emerging market. Liquidity is proxied by three measures; relative volume, relative quoted depth and proportion of zero-returns. The results using a sample of 481 public-listed firms in Malaysia show that more independent and diligent boards are associated with higher liquidity. Ó 2010 Elsevier Ltd. All rights reserved. 1. Introduction A series of high profile corporate collapses in recent years has spawned much interest and research in the role of corpo- rate governance in mitigating agency problems. Various parties including regulators, shareholder and users of financial infor- mation are pushing for more efficient corporate governance mechanisms. These stakeholders are also demanding for more vigilant and effective boards. In tandem with these developments, there are also some initiatives and regulations moving towards mandating some of the recommendations which were previously voluntary in nature. For example, in Malaysia, the Malaysian Code on Corporate Governance (MCCG hereafter) requires companies to have an effective board with a bal- ance of executive directors and non executive’s directors (see MCCG, 2007). Corporate governance is important given it comprises the prescription to ensure that management activities are in line with the interest of shareholders (Kanagaretnam et al., 2007). In addition, corporate governance mechanisms can also influ- ence the information disclosed by firms to its shareholder and this, in turn, is likely to help reduce the incidence of informa- tion asymmetry between management and shareholders. Prior studies (Gul and Leung, 2004; Cai et al., 2006; Kanagaretnam et al., 2007) show that firms with boards that are effective in monitoring management activities tend to be associated with more frequent disclosures of quality information which, in turn, reduces information asymmetry. In this paper, we focus on an important facet of information asymmetry – stock liquidity. More specifically, we examine the relationship between board strength and stock liquidity in Malaysia. Stock liquidity is important as it affects the stock expected returns and cost of capital. As a result, it has an impact on the flow of capital and growth and development of the market. Thus an understanding of whether corporate governance can facilitate more liquidity in the market, especially in an emerging economy is important. Levine and Zervos (1998) suggest that stock market liquidity is positively and robustly 1815-5669/$ - see front matter Ó 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.jcae.2010.10.001 ⇑ Corresponding author. E-mail addresses: foo.yee.boon@buseco.monash.edu.my (Y.-B. Foo), mazlina.zain@mmu.edu.my (M.M. Zain). Journal of Contemporary Accounting & Economics 6 (2010) 92–100 Contents lists available at ScienceDirect Journal of Contemporary Accounting & Economics journal homepage: www.elsevier.com/locate/jcae