Impact of corporate governance compliance and board attributes on operating liquidity in pre- and post-corporate governance reforms

Purpose This study aims to investigate the impact of corporate governance compliance, governance reforms and board attributes on operating liquidity of Pakistani listed non-financial firms. The study further tests how these relationships vary in the pre- and post-corporate governance reforms. Design/methodology/approach Fixed-effect regression model is used on 10 years panel data from 2007 to 2016 for a sample of 170 firms listed on the Pakistan Stock Exchange. Two-stage least squares model is used for addressing the endogeneity problem. Findings The findings reveal that governance compliance and governance reforms negatively affect operating liquidity. Among the board attributes, board meetings, directors' remuneration, board foreign diversity and board gender diversity are significantly related to operating liquidity. Further exploration indicates that internal governance mechanisms are less effective to safeguard shareholders from expropriation during weak external governance. This suggests that strong external governance is inevitable to the effectiveness of internal governance mechanisms. Overall, the study findings support the agency theory. Practical implications The findings provide valid recommendations to policymakers interested in safeguarding the investors to focus on macro-level governance for making the micro-level governance effective. Further, the results provide the executives with an insight to improve the compliance level with the code of corporate governance. Originality/value Unlike prior studies, this study examines the impact of corporate governance compliance and novel board attributes - directors' attendance at board meetings, number of board committees, directors' remuneration and board foreign diversity on operating liquidity. Further, the study subdivides its sample period into pre- and post-corporate governance reforms to examine how external governance influences internal governance effectiveness.