Abstract: The paper applies market microstructure approach to study the problem of corporate governance on the case of separation of ownership and control power. Focus on the real operating environment where investors are engaged in monitoring activities with direct productive value, and meanwhile trading equity of the supervised company in the stock market, the paper adopts the Jain and Mirman's correlated signal model to examine the effect of open market transactions of investors with major stakes on their internal monitoring and control behavior. The paper concludes that the monitoring level of the investors and the corporate governance performance are affected by stock market microstructure factors such as stock market liquidity. The paper further reveals how to build an external equity market environment where investors can monitor and control more effectively.