Purpose: The purpose of this study is to examine the capital market effects of corporate governance (CG) practices of a “comply or explain” environment on stock market liquidity in a frontier market.
Design/methodology/approach: Using secondary data from Nairobi Securities Exchange, the liquidity position is analyzed using panel data random effects regression against CG guidelines.
Findings: The results show a negative and significant relationship between CG compliance and stock market liquidity, suggesting that regulated CG practices improve market liquidity in Kenya. The results are remarkably robust to different measures of liquidity and supports agency and signaling theory.
Practical implications: The authors provide evidence to show that security regulation improves stock market liquidity in a frontier market whose characteristics are thought not to favor regulation. Therefore, regulators and stakeholders could be motivated by the benefits of regulation, and this could lead to renewed effort to improve CG compliance.
Originality value: The findings show that security market regulation through CG guidelines can improve stock market liquidity in frontier markets. This offers regulators and policymakers a strong motivation to enhance security regulation to improve capital market confidence.